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The Bank of Canada Cuts Rates Further in September

Canadian Economics

By: Walter Bolduc

  • The Bank of Canada cut its target for the overnight rate to 4.25 per cent, with the Bank rate to 4.5 per cent, and the deposit rate to 4.25 per cent.
  • The global economy grew by 2.5 per cent in Q2—in line with the Bank’s projections in its July Monetary Policy Report. Inflation in the United States and Euro-area continues to moderate. The United States’ economy grew more than expected thanks to healthy gains in consumer spending, while its labour market slowed. In China, weak domestic demand has impacted its economic growth.
  • The Canadian dollar has appreciated on the back of a lower U.S. dollar.
  • Driven by government spending and business investment, the Canadian economy grew 2.1 per cent (annualized) in Q2—stronger than the Bank’s projections from July.
  • The Canadian economy likely had a soft June and July, driven by a slower labour market. Wage growth, however, remains high relative to productivity.
  • The Bank’s preferred measures of core inflation averaged 2.5 per cent in July and the share of CPI components growing above 3 per cent is roughly around the historic norm.
  • Excess supply is pushing inflation down while price pressures in shelter and services are holding inflation up. The Governing Council of the Bank of Canada is committed to restoring price stability and is carefully assessing the opposing forces on inflation.

Insights

Inflation is moving in a positive direction. July’s CPI came in at 2.5 per cent (year-over-year), 0.2 percentage points lower than in June. This was an important factor in the Bank’s decision to cut rates again this month—a move welcomed by consumers and businesses alike. While persistent price growth for services remains a challenge, inflation in other key categories continues to ease. Part of this comes via a base-year effect, but other elements such as a cooler labour market have also lent a hand in easing inflation. Looking ahead, we are in line with the Bank’s thinking that their 2 per cent target will be reached in mid-2025.

The Canadian economy has outperformed expectations in 2024. Looking ahead, growth will likely be modest in the third quarter but will pick up in 2025 as the impact of lower interest rates are felt through the economy. Better growth prospects will also be accompanied by a stronger labour market, and we see the unemployment rate gradually declining through next year.

The United States’ Federal Reserve (Fed) is expected to cut in September. Given the United States’ progress on inflation recently, the Fed has turned more dovish on interest rates, with Chairman Powell openly declaring that “The time has come for policy to adjust.” Cuts from the Fed will provide some breathing room to the Bank of Canada to continue its rate cutting cycle without creating too large of a spread between the two central banks’ key rates. The Fed’s next interest rate announcement is scheduled for September 18.

To see how business confidence has progressed as the Bank continues its rate cut cycle, consult our Index of Business Confidence.

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