| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Change | -25bp | -25bp to 0bp | -25bp | -25bp |
| Level | 4.50% | 4.50% to 4.75% | 4.50% | 4.75% |
Highlights
The Bank of Canada lowered its policy interest rate -- the target for overnight lending rates -- by another 25 basis points to 4.50 percent, as widely expected, to help cushion the impact of its earlier rapid credit tightening on households and businesses after delivering its first rate cut in more than four years in June. The bank also decided to continue its policy of quantitative tightening to trim the bank's balance sheet to a normal level. The process is likely to end sometime next year when the bank will resume normal purchases of government bonds.
The bank left its door open for more interest rate cuts so that the cumulative effects of past rate hikes do no chill economic activity more than necessary. Recent data have shown no slack in the economy and the labor market is not catching up with population growth boosted by Canada's strong immigration policy.
"Ongoing excess supply is lowering inflationary pressures," the bank said in a statement."At the same time, price pressures in some important parts of the economy -- notably shelter and some other services -- are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation."
"Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook," it said.
In his opening remarks at a news conference, Governor Tiff Macklem said,"With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations."
"We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2 percent target," he said.
Looking ahead, the governor said,"If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate." The bank's policymakers"will be taking our monetary policy decisions one at a time," he said and repeated several times throughout the news conference that"we are taking one meeting a time."
Economists continue to expect the bank to cut internet rates two more times to bring the policy rate to 4% before the end of the year. The BoC's next rate announcements are scheduled for Sept. 4, Oct. 23 and Dec. 11.
The annual inflation rate eased back to 2.7 percent in June, mainly driven by lower gasoline prices, after unexpectedly rising to 2.9 percent in May from a three-year low of 2.7 percent hit in April. Employment fell 1,400 in June versus a consensus call of a 21,300 gain after rising 27,000 in May while the unemployment rate rose to 6.4 percent from 6.2 percent, up 1.3 percentage points since April 2023.
The latest policy decision follows the action in June, which was the first interest rate cut by the bank since March 2020 but also left monetary policy"restrictive" to economic activity, and thus differs from three emergency rate reductions, from 1.75 percent to 0.25 percent, at the early phase of the pandemic when demand plunged across the world. The bank is in the process of gradually unwinding the 10 rate hikes totaling 475 basis points that it conducted between March 2022 and July 2023, taking the overnight rate to a 22-year high of 5 percent from its record low of 0.25 percent.
The bank left its door open for more interest rate cuts so that the cumulative effects of past rate hikes do no chill economic activity more than necessary. Recent data have shown no slack in the economy and the labor market is not catching up with population growth boosted by Canada's strong immigration policy.
"Ongoing excess supply is lowering inflationary pressures," the bank said in a statement."At the same time, price pressures in some important parts of the economy -- notably shelter and some other services -- are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation."
"Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook," it said.
In his opening remarks at a news conference, Governor Tiff Macklem said,"With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations."
"We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2 percent target," he said.
Looking ahead, the governor said,"If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate." The bank's policymakers"will be taking our monetary policy decisions one at a time," he said and repeated several times throughout the news conference that"we are taking one meeting a time."
Economists continue to expect the bank to cut internet rates two more times to bring the policy rate to 4% before the end of the year. The BoC's next rate announcements are scheduled for Sept. 4, Oct. 23 and Dec. 11.
The annual inflation rate eased back to 2.7 percent in June, mainly driven by lower gasoline prices, after unexpectedly rising to 2.9 percent in May from a three-year low of 2.7 percent hit in April. Employment fell 1,400 in June versus a consensus call of a 21,300 gain after rising 27,000 in May while the unemployment rate rose to 6.4 percent from 6.2 percent, up 1.3 percentage points since April 2023.
The latest policy decision follows the action in June, which was the first interest rate cut by the bank since March 2020 but also left monetary policy"restrictive" to economic activity, and thus differs from three emergency rate reductions, from 1.75 percent to 0.25 percent, at the early phase of the pandemic when demand plunged across the world. The bank is in the process of gradually unwinding the 10 rate hikes totaling 475 basis points that it conducted between March 2022 and July 2023, taking the overnight rate to a 22-year high of 5 percent from its record low of 0.25 percent.
Market Consensus Before Announcement
Sticky but easing inflation, rising unemployment and slower growth prospects have raised the possibility that the Bank of Canada's policymakers will trim the policy interest rate -- the target for overnight lending rates -- by another 25 basis points to 4.50 percent for a second straight time to help cushion the impact of its earlier rapid credit tightening aimed at taming inflation after delivering its first rate cut since March 2020 in June.
The annual inflation rate eased back to 2.7 percent in June, mainly driven by lower gasoline prices, after unexpectedly rising to 2.9 percent in May from a three-year low of 2.7 percent hit in April. Employment fell 1,400 in June versus a consensus call of a 21,300 gain after rising 27,000 in May while the unemployment rate rose to 6.4 percent from 6.2 percent, up 1.3 percentage points since April 2023. One problem for the bank is that the year-over-year increase in average hourly wages accelerated to 5.4 percent in June from 5.1 percent in May.
The annual inflation rate eased back to 2.7 percent in June, mainly driven by lower gasoline prices, after unexpectedly rising to 2.9 percent in May from a three-year low of 2.7 percent hit in April. Employment fell 1,400 in June versus a consensus call of a 21,300 gain after rising 27,000 in May while the unemployment rate rose to 6.4 percent from 6.2 percent, up 1.3 percentage points since April 2023. One problem for the bank is that the year-over-year increase in average hourly wages accelerated to 5.4 percent in June from 5.1 percent in May.
Definition
Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
