From National Bank of Canada

For the third time in as many meetings, the Bank of Canada lowered the target for the overnight rate by 25 basis points, a decision in line with the consensus and market expectations. The rate reduction brings the policy rate to 4.25%, the lowest since January 2023. The move also pushes the BoC’s policy rate 125 bps below the Federal Reserve’s (based on their upper bound target), the most since 2000 (although that gap will narrow in September). Meanwhile, balance sheet normalization will continue as expected. Here are additional highlights from the communique and the opening statement to the press conference:

• Driving the decision to cut was “continued easing in broad inflationary pressures” and “excess supply in the economy [putting] downward pressure on inflation”.
• Once again, forward rate guidance in the press release was vague but the opening statement to the presser reiterated that “it is reasonable to expect further cuts” if inflation eases in line with their forecast.
• The statement notes that Q2 growth was stronger than expected but “preliminary indicators suggest that economic activity was soft through June and July”. Macklem added they “want to see economic growth pick up to absorb slack”.
• The press release highlights that “the labour market continues to slow, with little change in employment in recent months”. However, wage growth “remains elevated relative to productivity”. In the opening statement to the presser, Macklem added they still expect slack in the labour market to slow wage growth.
• As for inflation there has been “continued easing in broad inflationary pressures”, with inflation breadth back to historical norms. Although shelter is holding inflation up, it is “starting to slow”. Reflecting base effects, Macklem added that inflation may “bump up” later in the year. However, they “need to need to increasingly guard against the risk that the economy is too weak, and inflation falls too much.”.

Bottom Line:

With a 25 basis point rate cut all but assured, the focus of today’s decision was always going to be on the Bank’s guidance/stance. Overall, there was very little changed relative to July as Macklem reiterated it is still “reasonable” to expect further rate cuts (as long as inflation cooperates). At the margin, there appears to be a bit more confidence on the inflation outlook as shelter prices are seen as “starting to slow”. And as we got a sense of in July, they “increasingly” want to guard against too much slack and inflation undershooting over the projection horizon. They therefore “need” growth to pick up. What does it mean for the meetings ahead? To us, the BoC’s base case outlook is for continued 25 basis points cuts at each of the remaining meetings in 2024 (and likely well into 2025 too). However, there is a growing focus on downside inflation/economic risks which should keep markets pricing some probability of a larger-than-25 basis point cut. That’s appropriate in our view given the balance of risks in the labour market and on the growth outlook. The intermeeting period will offer a wealth of information to inform the near-term rate path as we’re due to receive two employment reports (including one on Friday), two CPI reports, a read on July GDP and a Business Outlook Survey. Undoubtedly, it will be jobs and inflation data that will be most influential.

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