The Canadian population is surging but concerns of excess supply are still mounting. As widely anticipated, the Bank of Canada (BoC) announced a rate cut this morning at its September meeting. The central bank is seeing progress on inflation but it may be too much—they’re now worried about deflation. At least one of Canada’s largest banks told investors they expect easing to continue and even accelerate if the labor market continues to erode at the current pace.
Bank of Canada Rate Cuts Amongst The Fastest In The G10
The BoC slashed rates this morning, as widely expected. The overnight rate was cut by 0.25 points to 4.25%, pushing it to the lowest level since the start of 2023. Monetary policy seems to be moving unusually fast and panicked under this leadership—first with tightening and now with easing.
“This marks the third cut in three consecutive meetings, and leaves the BoC as the top cutter among G10 central banks so far this cycle,” explained Douglas Porter, chief economist at BMO.
Elected officials have been framing the fact Canada is ahead of other G7s as a good thing. Unfortunately, the reality is that rapidly slowing inflation means the economy is underperforming the global economy. The BoC Governor glossed over the issue, but did make a point to mention it.
Bank of Canada Now Worried Inflation May Be Cooling Too Fast
The primary objective at the BoC is to control inflation, and they’re finally doing it. Annual growth of the consumer price index (CPI) came in at 2.5% for July, shedding 0.1 points from the previous month. Not quite down to the target rate of 2% but progress is being made fast. Perhaps a little too fast.
“Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up,” said BoC Governor Tiff Macklem.
Adding, “The Governing Council is carefully assessing these opposing forces on inflation.”
Governor Macklem further reiterated the BoC Governing Council will be making data-dependent decisions. They attribute the current inflation slowing in part to a base effect, and see inflation potentially rising later in the year. It’s worth recalling the BoC previously failed to raise rates due to the belief that elevated inflation was due to a base effect. The fear of high inflation is less worrying than the fear of too little inflation, apparently.
The central bank generally expects inflation to fall, but upside concerns remain. “… 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,” said Macklem.
BMO Sees Sharp Cuts To Interest Rates—Which Can Get Sharper
Market experts don’t share the BoC concerns of inflation accelerating anytime soon. BMO anticipates a series of 0.25 point cuts over the next few months. They see the risk of easing even faster with the weak labor market, even citing the potential for a 0.5 point cut if the erosion happens fast enough.
“For now, we look for the Bank to cut rates to 3.5% by January, and then to 3.0% by next June, but the risks tilt to the Bank going faster than that, and potentially further,” said Porter.
