Bank of Canada: three and counting

As expected, the Bank of Canada today delivered its third 25 basis point rate cut in the current easing cycle, bringing the overnight rate target to 4.25 percent. Governor Macklem's subsequent statement to the media provides a comprehensive summary of the Bank's policy outlook. In essence, the Bank will "take our monetary policy decisions one at a time", but is clearly biased toward further easing in the coming months. 

Macklem noted that GDP growth in Q2, at a 2.1 percent annualized rate, was faster than the Bank had predicted. It had expected growth to continue to accelerate in the second half of the year, but now sees some downside risk to this, in the form of the reported slowdown in growth in June and July and the lack of employment gains in recent months. Later in the statement, Macklem spells out the policy implications of this outlook: "we need to increasingly guard against the risk that the economy is too weak and inflation falls too much".

In terms of the inflation picture, Macklem sounds reasonably confident: "CPI inflation eased further to 2.5% in July, and our preferred measures of core inflation also moved lower. With the share of CPI components growing above 3% now around its historical norm, there is little evidence of broad-based price pressures". Shelter costs are now the biggest contributor to overall inflation. Rate cuts such as today's will marginally help with this, as floating rate mortgage rates follow the overnight rate lower, but it is unlikely that pressure on housing costs can be meaningfully reduced against the background of a rapidly rising population. 

The Bank sees some risk that unwinding base effects may push headline CPI higher for a time later this  year. It seems likely that the Bank will "look through" this (but good luck persuading the media to do the same)!  "If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate".  Further 25 basis point rate cuts are likely at each of the Bank's two remaining fixed decision dates this year, and the tone of Gov. Macklem's statement suggests that a 50 basis point cut may happen if the mid-year weakness in the economy shows signs of persisting.