Bank of Canada governor said growth needs to pick up so inflation doesn’t fall too much.
The Bank of Canada has trimmed its key policy rate by 25 basis points for the second month in a row, bringing it down to 4.5 percent, and said more cuts were likely if inflation continued to cool in line with forecasts.
The Bank announced the rate cut on Wednesday.
The bank had previously kept the rate at a two-decade high of 5 percent for almost a year in a bid to combat high inflation by suppressing economic growth.
“We are increasingly confident that the ingredients to bring inflation back to target are in place,” Governor Tiff Macklem told reporters. The bank reiterated that inflation should return sustainably to its 2 percent target in the second half of 2025.
The Bank trimmed its 2024 growth forecast to a lacklustre 1.2 percent from the 1.5 percent it predicted in April, in part because households are setting aside more money to pay debts and have less to spend on discretionary items.
The Canadian dollar weakened further after the rate cut announcement, with the loonie trading down 0.06 percent to 1.3794 against the US dollar, or 72.5 US cents.
Money markets are seeing a 52 percent chance of a cut in the Bank’s next monetary policy decision announcement on September 4, and factoring in just one more 25 basis point cut this year, which would bring the policy rate down to 4.25 percent.
“We need growth to pick up so inflation does not fall too much,” said Macklem. The downside risks to inflation were taking on increased weight in monetary policy deliberations, he said.
Inflation is facing two opposing forces – a weak economy pulling it down and persistently high prices of shelter and services keeping it up.
“The risk that inflation comes in higher than expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected,” said Macklem.
Consumer prices in June slackened to 2.7 percent with the bank’s closely tracked core measures of inflation also easing marginally. But this data followed a surprise jump in May.
In its quarterly Monetary Policy Report (MPR) released on Wednesday, the bank projected overall inflation would be 2.6 percent this year and 2.4 percent next year.
First quarter annualised growth was just 1.7 percent, way below the bank’s April forecast of 2.8 percent.
The Bank said growth would increase in the second half, led by stronger exports and a recovery in household spending as borrowing costs ease.
“With the economy strengthening, excess supply will be absorbed next year and into 2026,” Macklem said.
The Bank said it expected growth to be 2.1 percent in 2025, revised from 2.2 percent in April, and 2.6 percent in 2026.
