The BoC cuts, again

The Bank of Canada has cut rates by 25bp for the third successive meeting, taking the policy rate to 4.25%, matching consensus expectations. With little surprise anticipated in the headline announcement, all attention was on the details of today’s decision.

Here too there were few revelations, with the Governing Council happy to run back similar messaging to the July policy meeting, and with a tone that on balance was largely unchanged. To us, this suggests that further rate cuts will be on the table at upcoming deliberations, and are likely to be delivered, data permitting. We continue to expect 25bps of easing at both the October and December policy meetings.

The Bank’s decision to cut rates by 25bp today had been expected by most economists polled by Bloomberg. 30 of 34 looked for the Governing Council to ease policy, the other 4 projected a hold. Perhaps surprisingly, markets were pricing an almost 25% chance that the Bank could deliver a 50bp cut ahead of today’s announcement.

With the decision ultimately delivering a smaller 25bp rate cut, this largely explains a modest loonie rally post-announcement.

This price action also belied the general tone of today’s communications, which were little changed from July. Indeed, Governor Macklem’s opening comments repeated a note that “it is reasonable to expect further cuts in our policy rate” while stressing that the Bank is not on a pre-determined path and that future decisions remain data-dependent.

Although this latest messaging was in line with prior commentary when taken as a whole, we think there were two key takeaways of note from today’s decision. First, there appears to be little appetite for cutting faster than the current series of 25bp increments, albeit Macklem acknowledged discussion of such a move in the Governing Council’s deliberations. Second, the Governor also noted an increasing need to guard against inflation falling too much – a stronger statement than prior comments. Considering today’s communications, we continue to think that there remains a high bar for a 50bp cut. But equally, Macklem’s emphasis on downside inflation risks also raises the threshold for the Governing Council to pause.

We continue to look for the Bank to deliver a further string of successive 25bp cuts. We also expect this to be amongst the most aggressive easing paths in the G10, leaving rate differentials to weigh on CAD in the short run, before improving growth supports a loonie recovery later this year and into 2025.

Author: 

Nick Rees, Senior FX Market Analyst

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