1) (Updated) BoC delivers half percentage point rate cut, says it now must keep inflation at 2%2) 2) With inflation below target, BoC expected to deliver supersized rate cut this week

Courtesy Barrie360.com and Canadian Press

By Nojoud Al Mallees, Oct. 23, 2024

The Bank of Canada claimed victory against high inflation on Wednesday as it delivered a supersized interest rate cut and signalled its policy rate will likely continue falling in the coming months. 

The half-percentage point interest rate cut marks the fourth consecutive rate cut since June and brings the central bank’s policy interest rate down to 3.75 per cent.

With annual price growth now around two per cent, governor Tiff Macklem says the Bank of Canada’s job has shifted from lowering inflation to maintaining it around the inflation target.

“We took a bigger step today because inflation is now back to the two per cent target and we want to keep it close to the target,” Macklem said in his opening statement.

Canada’s inflation rate fell to 1.6 per cent in September, solidifying forecasters’ expectations for a larger rate cut. Bigger cuts mean the rate can be lowered faster.”

The recent data has allowed the Bank of Canada to more decisively plant the victory flag in its battle to get inflation to its two per cent target on a sustainable basis,” wrote CIBC chief economist Avery Shenfeld in a client note. 

Macklem said the central bank expects it will lower the interest rate further — so long as the economy evolves in line with its forecast — but he stopped short of saying whether the he expects another half-point cut is likely in December. 

“I’m not going to handicap the next move,” Macklem said. “I think we’ve been pretty clear on the direction. And I think we’ve been pretty clear that the timing and the pace is going to depend on how the data evolves.”

He later went on to say that it’s difficult to lay out a clearer trajectory on interest rates because the central bank “doesn’t know the future.”

“We’re discovering how the economy is evolving, like everybody else, and based on the best available information we have at the time, we’ll take our decisions.”

The Bank of Canada attributes the slowdown in price growth to shelter price inflation easing, supply outpacing demand in the economy and global oil pricing falling.

It’s now forecasting inflation will remain around the two per cent target throughout its projection horizon, which extends to 2026.

High interest rates have sent a chill through the Canadian economy, slowing growth and loosening the labour market.

The central bank says in its monetary policy report that while layoffs have remained stable, businesses have pulled back on hiring, which has disproportionately affected young people and newcomers.

As interest rates continue to come down, the Bank of Canada is projecting economic growth to pick back up in 2025 and 2026.

“High inflation and interest rates have been a heavy burden for Canadians. With inflation now back to target and interest rates continuing to come down, families, businesses and communities should feel some relief,” Macklem said.

The Bank of Canada’s next interest rate announcement is scheduled for Dec. 11.

2) With inflation below target, BoC expected to deliver supersized rate cut this week

Courtesy Barrie360.com and Canadian Press

By Nojoud Al Mallees, October 20, 2024

Forecasters expect the Bank of Canada to speed up the pace of interest rate cuts and lower its policy rate by half a percentage point this week.

The central bank’s interest rate announcement on Wednesday comes after Statistics Canada reported the annual inflation rate in September tumbled to 1.6 per cent — below the Bank of Canada’s two per cent inflation target.

Nathan Janzen, an assistant chief economist at RBC, said the latest consumer price index report reinforced his expectation for a supersized rate cut.

“(You) have an economy that’s probably performing worse than necessary to get inflation under control and still interest rates (are) at restrictive territory. So that makes it a pretty straightforward argument to continue cutting interest rates,” Janzen said, adding that the central bank needs to lower interest rates to a level that doesn’t hinder economic growth.

After the Bank of Canada’s interest rate cut last month, governor Tiff Macklem signalled that the central bank will be ready to cut rates more aggressively if inflation falls by too much.

He’s also said that the central bank now wants to see economic growth pick back up again.

The Bank of Canada has lowered its key interest rate three times so far, bringing it down to 4.25 per cent.

The sharp slowdown in inflation this year has come as somewhat of a surprise for economists who feared price growth might take longer to tame.

Now, the Bank of Canada is contending with the risk that interest rates may actually restrain economic growth by more than desired.

Although the Canadian economy has continued to grow modestly, real gross domestic product has shrunk on a per-capita basis for five consecutive quarters.

The labour market has also loosened considerably, with the unemployment rate in September sitting at 6.5 per cent — up a full percentage point from a year earlier.

The gloomy economic backdrop paired with plummeting inflation have many forecasters convinced that the Bank of Canada will deliver back-to-back jumbo interest rate cuts in both October and December, which would bring its policy rate down to 3.25 per cent.

The parliamentary budget officer projected in its recent economic and fiscal outlook that the central bank will continue cutting rates until its policy rate reaches 2.75 per cent in the second quarter of 2025.

Carl Gomez, chief economist at real estate data company CoStar, said real interest rates in Canada — which are adjusted for inflation — are much higher than in other countries, putting more downward pressure on the Canadian economy.

“What’s interesting is Canada’s real policy rate is still much higher than every other country, but we are dealing with a far weaker economy in Canada than the United States. So this just tells you another reason why the Bank of Canada is so far behind the curve,” Gomez said.

The U.S. annual inflation rate fell to 2.4 per cent in September while the Federal Reserve’s policy rate sits at 4.75 to five per cent.

The Bank of Canada’s interest rate cuts were expected to stimulate activity in the housing market again, raising fears that inflation could rebound.

But Gomez said that while home listings have increased, demand in the housing market is still tepid.

“It’s turned into more of a buyer’s market, which is still pulling house prices down; not allowing them to continue to move up as they had been pre-pandemic,” Gomez said.

Janzen said that while lower interest rates help somewhat with affordability, home prices are still too expensive for many people.

Higher unemployment among younger people is likely weighing on housing demand as well, he said, given many of them would be prospective first-time homebuyers.

“Interest rates are falling, but labour markets are also softening at the same time, so we’re not expecting the same kind of a jump in housing market activity as you might normally expect if interest rates were falling when the unemployment rate was low,” Janzen said.

In addition to its interest rate announcement, the Bank of Canada will publish its quarterly monetary policy report on Wednesday, which will include new economic forecasts.