The Bank of Canada today cut its overnight interest rate target by 25 basis points to 4.25%, marking the second consecutive rate cut in the monetary tightening cycle. This outcome was widely expected, as we discussed in our event guide.
The Bank of Canada indicated in its statement the following:
- The global economy grew by about 2.50% in the second quarter, in line with July expectations.
- Canada’s economy grew by 2.1% in the second quarter, slightly above expectations.
- Inflation slowed to 2.5% in July, with core inflation measures averaging around 2.5%.
- Rising house prices remain the largest contributor to overall inflation but are beginning to slow.
Link to Bank of Canada September Statement
In his press conference, Bank of Canada Governor Tiff Macklem emphasized several key points:
- The risk of weak inflation is now a factor in interest rate decisions.
- Lowering interest rates would help ease pressure on households that are “feeling the pinch from higher interest rates.”
- The economy needs growth of more than 2%.
- ‘There is enough slack in the economy’ to lift CPI to 2% target
- Bank of Canada ‘ready’ to take ‘bolder step’ on rate cuts if needed
“With broad-based inflationary pressures continuing to ease, the Governing Council decided to cut the policy rate by another 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while increases in the prices of shelter and some other services are keeping inflation elevated,” Macklem added.
Summary: The Bank of Canada cut interest rates by 25 basis points and signaled its readiness to ease more aggressively if needed, with a focus on balancing inflation and economic growth risks.
Link to Bank of Canada September Press Conference
Market Reactions
Canadian Dollar Overlay Against Major Currencies Chart by TradingView
Despite the cut, the initial reaction to the BoC statement at 09:45 AM ET saw a short-term boost to the Canadian dollar across the board, suggesting a “buy the rumors, sell the news” reaction, which is somewhat expected given the selling pressure on the Canadian dollar that began in the London session leading up to the event.
However, this trend was quickly reversed against most major currencies before the start of the next hour. This is likely to reflect a combination of the interest rate cuts and the risk-off environment that markets witnessed during the session.
The start of the Bank of Canada press conference at 10:30 a.m. sparked another very short-lived bout of CAD strengthening, but as the press conference progressed, the CAD’s performance varied across currency pairs.
The Canadian dollar held and extended its gains against some currencies (notably the Australian dollar, the British pound and the New Zealand dollar) while losing some ground against others (notably the Japanese yen and the Swiss franc), suggesting that the weight of broad market sentiment was the main driver of the Canadian dollar’s behaviour.