Investing.com - The Bank of Canada (BoC) reduced its overnight rate to 4.5% on Wednesday, a move anticipated by many, including analysts at Citi.
The central bank’s decision, influenced by easing inflation, sets the stage for another potential rate cut in September.
Key Takeaways:
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The BoC has reduced its overnight rate target by 25 basis points to 4.5% while maintaining its Quantitative Tightening policy.
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BoC Governor Tiff Macklem highlighted growing concerns about downside risks in their monetary policy considerations.
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Another 25bp rate cut is expected in September, with the rate possibly falling to 3.75% by the end of 2024.
BoC’s July Rate Cut: On July 24, the BoC lowered its policy rate by 25 basis points to 4.5%. This rate reduction comes as broad price pressures ease and inflation trends closer to the bank’s 2% target. This marks the second consecutive rate cut, consistent with Citi’s earlier projections.
Growing Concerns on Economic Downside Risks: Governor Tiff Macklem made it clear that further rate cuts are likely if the inflation trajectory continues as forecasted. He expressed that the downside risks to the economy are becoming more pronounced, primarily due to excess supply driven by rapid population growth outstripping GDP growth.
Data-Dependent Policy: The BoC’s monetary policy remains reliant on incoming data. Despite the dovish stance, there are still potential inflationary pressures, particularly from high shelter costs and increasing wages. Macklem also noted that the BoC would consider the actions of the U.S. Federal Reserve when determining their rate adjustment pace.
Anticipating a September Rate Cut: Citi analysts forecast another 25bp rate cut at the BoC’s September 4 meeting, citing continuing declines in inflation and a weakening labor market. The rise in the unemployment rate, sluggish job creation, and minimal monthly GDP growth all support this prediction. Additionally, Citi expects further cuts throughout the year, bringing the policy rate to 3.75% by year-end and down to 3.00% by the conclusion of 2025.
Market Reactions and Projections:
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Rates: Citi suggests that the CAD curve might present a better central bank steepener than the U.S. curve. After the BoC's dovish communication, CAD rates rallied, especially at the shorter end of the curve. The market now factors in a 50% chance of a rate cut at the September meeting.
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FX: Despite dovish signals, the USDCAD pair remained below 1.38, indicating the rate cut was largely anticipated. Citi projects possible depreciation of USDCAD, contingent on forthcoming U.S. GDP and PCE data. The firm retains its year-end forecast for USDCAD at 1.35, anticipating that improvements in Canada’s growth and subsequent Fed rate cuts will support their outlook.
New Economic Forecasts: The BoC revised its 2024 GDP growth forecast downward to 1.2% from 1.5% and adjusted its 2025 forecast to 2.1% from 2.2%. The central bank maintained its 2024 inflation forecast at 2.6% but raised the 2025 forecast to 2.4% from 2.2%. The BoC continues to estimate the neutral nominal interest rate within a range of 2.25% to 3.25%.