Bigger cut is possible indicated as Bank of Canada cuts rates

 

The Bank of Canada (BoC) has trimmed its key policy rate by 25 basis points to 4.25 percent as forecast and Governor Tiff Macklem, citing weak growth, said a larger cut could be in order if the economy needs a boost.

The bank had held its benchmark rate at a two-decade high of 5 percent for a year until June when it started the easing cycle.

Wednesday marked the third consecutive cut, with the bank citing continued easing in broad inflationary pressures.

Overall inflation fell to a 40-month low of 2.5 percent in July, still above the BoC’s target of 2 percent. But the economy now looks to be weaker than the bank had forecast just six weeks ago.

“With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” Macklem said.

Second-quarter growth was better than expected at 2.1 percent, but it flattened out in June and is likely to be anemic in July. Growth could fall short of the 2.8 percent annualized third-quarter advance the bank projected in July, economists say.

Macklem echoed their comments at a press conference, saying that while he expects growth to pick up in the second half of the year, there could be some risks to the projections.

A weakening economy has hurt the country’s ability to absorb a sharply rising workforce, leading to a rise in unemployment, prompting calls for continued rate cuts.

Some economists are predicting that slow growth could prompt the bank to go for a jumbo cut of 50 basis points (bps) in October or December. Macklem said a bigger cut was possible if the economy weakened more than expected.

“We will be assessing the data as it comes out, and [if] we need to take a bigger step, we’re prepared to take a bigger step,” he said.

Financial markets see a 93 percent chance of a rate cut of 25 bps in October while a rate reduction in December is fully priced in.

“With growth faltering instead of picking up as officials had forecast back in July, the risk is that central bankers will need to slash rates in October by 50bps instead of 25bps to spur a recovery,” Royce Mendes, head of macro strategy at Desjardins Group, wrote in a note.