The Bank of Canada cut interest rates for a third consecutive time on Wednesday, Sept. 4, bringing its benchmark interest rate to 4.25 per cent. Josh Nye, a fixed income strategist for RBC Wealth Management Canada, explains the latest cut and what to expect moving forward.
The Bank of Canada cut its policy rate by 25 basis points for the third time in a row in September, bringing the overnight rate down to 4.25%. Governor Tiff Macklem said there was clear consensus for a 25-basis-point move, and while he discussed factors that could cause the central bank to speed up or slow down its rate-cutting cycle, it doesn’t sound like those alternatives were given much thought in the latest decision. That’s not all that surprising; despite some market volatility in the past six weeks, not much has changed from an economic standpoint since the Bank’s July meeting. Inflation continued to slow to around 2.5%, while economic activity and the labour market showed further signs of softening.
Governor Macklem reiterated that more rate cuts are likely if inflation continues to evolve as expected, and we think it’s reasonable to expect the Bank will continue with 25 basis point moves at each of its upcoming meetings until the overnight rate reaches a more neutral level of around 3%. The market currently expects that to happen by the middle of next year. But with the Bank putting greater emphasis on downside risks to the economic outlook, it could cut rates slightly faster than the market anticipates, particularly if growth doesn’t pick up in the coming months.
Market reaction to the latest decision was relatively muted, with focus now shifting to the next round of U.S. jobs data. That will determine whether the U.S. Federal Reserve begins its rate cutting cycle with a 25 or 50 basis point move later this month. Growing expectations for Fed rate cuts have weighed on the U.S. dollar, causing the Canadian dollar to rally toward the middle of the 72-76 cent range that has prevailed for the past two years. If the Fed doesn’t validate those rate cut expectations, we could see the Canadian dollar giving back some of its recent gains. We’ll be watching closely when the Fed announces its decision on September 18th, followed by the Bank’s next decision on October 23rd. Stay tuned.
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