• The Bank of Canada (BoC) lowered the overnight rate by 25 basis points for a third straight meeting, adding to cuts in each of June and July. The move was in line with market and our own expectations ahead of the announcement.
• Governor Macklem’s opening statement for the press conference was again dovish, highlighting a shift in the central bank’s focus to a gradually weakening economy and for that to put further downward pressure on inflation. The BoC reiterated that it is “reasonable to expect further cuts” as long as those expectations are confirmed in the data.
• Data to-date has been cooperating. As mentioned in the opening statement, a slew of different inflation measures are all returning back closer to pre-pandemic “normal” levels. That puts inflation concerns more and more on the back burner.
• The BoC’s forecast in July was for core inflation (average of CPI trim and CPI median) to slow to 2.5% on a year-over-year basis in Q3. Latest in July, those measures were averaging at 2.6%.
• Moving forward, as much as high inflation is not welcome by the central bank, below-target inflation is also a growing concern, speaking to rising downside risks to both the economy and inflation relative to the central bank’s latest forecast.
• Indeed, the Canadian economy as the BoC indicated, remains in the state of excess supply in Q2 with the 2.1% quarterly annualized GDP growth once again falling short of potential GDP growth (estimated by the BoC at 2.4% for 2024) as surging population boosts the available labour supply.
• Meantime, hiring demand in Canada has slowed and struggled to keep up with rising labour supply. That has led the BoC again to expect still-elevated wage growth (particularly relative to soft labour productivity growth numbers) will continue to moderate in the period ahead.

Bottom line: The third straight interest rate cut in September from the BoC still leaves the overnight rate at relatively high (‘restrictive’) levels – particularly compared to a softening economic growth backdrop that's expected to keep inflation on a downward trajectory. Despite some pockets of sticky price growth (shelter and “some” other services), the tone from the BoC has clearly shifted to worrying about a gradually but persistently weakening economy. Already, growth in the third quarter is looking to undershoot the BoC’s July forecast of 2.8%. We continue to expect the BoC to follow with another rate cut in October. 

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