Etienne Bordeleau-Labrecque from Ninepoint Partners shares his views on the Bank of Canada’s decision to cut interest rates during an interview with BNN Bloomberg.
The Bank of Canada has reduced its key interest rate for the third consecutive time, cutting it by a quarter percentage point to 4.25%. Governor Tiff Macklem explained that this decision was driven by ongoing progress in controlling inflation and the need to stimulate economic growth. Although this move was widely anticipated, Macklem hinted that the central bank might adjust the pace of future rate cuts depending on economic conditions.
"If inflation pressures turn out to be stronger than expected, or if the economy shows less slack than we estimate, we might need to slow down the rate cuts," Macklem stated. On the other hand, if the economy weakens more than anticipated, a larger rate cut could be considered, he added.
Canada's economy expanded faster than expected during the second quarter of the year, but preliminary data from June and July suggested a slowdown in activity. Some financial experts, including CIBC's chief economist Avery Shenfeld, noted that the market had considered the possibility of a more significant half-percentage-point rate cut. However, the Bank of Canada opted for a cautious approach by implementing a smaller reduction.
Shenfeld commented, "While bold moves can be effective, the Bank of Canada chose a more measured approach with another quarter-point cut. Rates remain higher than where they need to be to fully stimulate the economy now that inflation pressures have eased."
Looking ahead, Macklem indicated that if inflation continues to decrease as predicted, further rate cuts are likely. Many forecasters expect additional cuts in October and December, which are the final two scheduled rate decisions for the year. So far, high interest rates have been effective in reducing inflation, which fell to 2.5% in July. However, housing costs continue to be a significant factor in driving inflation. On the positive side, lower interest rates have started to reduce mortgage costs.
With inflation nearing the central bank's target, Macklem emphasized the need to balance the potential risks. He cautioned that while inflation could still rise more than expected, the risk of the economy weakening too much and inflation falling below the target is also a concern.
TD's chief economist Beata Caranci supported the Bank of Canada's decision for a quarter-point rate cut, noting that the Canadian economy is sending mixed signals. However, she also pointed out that the downside risks, such as a weakening economy and falling inflation, are more concerning for the central bank. "We're beginning to see cracks in the job market and among consumers," Caranci remarked. She also noted that with inflation at 2.5%, which is close to the target, the focus should be on stabilising the economy rather than further reducing inflation.
Canada's unemployment rate has risen over the past year and a half, reaching 6.4% in July. Macklem acknowledged that the job market slowdown has particularly affected younger workers and immigrants. The next interest rate announcement from the Bank of Canada is scheduled for October 23.
