Rate Statement

The rate cutting cycle was turned up a notch as the Bank of Canada lowered its target for the overnight rate by 50 basis points to 3.75%, a decision in line with consensus and market expectations. This fourth cut in as many meetings marks a cumulative rate reduction of 125 basis points and brings the policy rate to its lowest point since December 2022. The move also pushes the BoC’s policy rate 125 basis points below the Federal Reserve’s, though an expected November Fed cut would narrow that gap. Meanwhile, balance sheet normalization will continue as expected. Here are some additional highlights from the communique and the opening statement to the press conference:

• Driving the decision to cut 50 bps was a desire to “support economic growth” and to “keep inflation close to the middle of the 1% to 3% range”.
• As for forward rate guidance, the Bank says, “we expect to reduce the policy rate further” if the economy evolves “broadly in line with our latest forecast”. As always, the “timing and pace” of further cuts, will be guided by incoming information.
• Despite recent soft data, the Bank still expects relatively solid GDP growth ahead: “GDP growth is forecast to strengthen gradually over the projection horizon, supported by lower interest rates.”
• The Bank appears to be looking the ‘strength’ of the September jobs report, as the statement simply says “the labour market remains soft”. Still, they note that wage growth “remains elevated relative to productivity growth.”
• The Bank highlights that inflation has “declined significantly” thanks to excess supply in the economy. The breadth of price increases have normalized, as have inflation expectations. Policymakers now expect inflation to “remain close to target over the projection horizon, with the upward and downward pressures roughly balancing out.”

https://www.nbc.ca/content/dam/bnc/taux-analyses/analyse-eco/boc-policy-monitor.pdf