Bank Of Canada Resumes Rate Cuts After 6 Month Pause

The Bank of Canada cuts rates by 25bp to 2.50%, as expected. This was the 8th consecutive rate cut since the easing cycle started one year ago, and took place after the bank paused following its last rate cut in March, 6 months ago.

Governor Tiff Macklem said that while “considerable uncertainty remains”, there was a “clear consensus” within the committee for the first rate cut since March, as slowing population gains and a weak labor market were a drag on consumption while the economy was weaker and there was “less upside risk to inflation.” The BoC head explained that the “Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks going forward.” Additionally, he noted the upward pressure on CPI has diminished.

The BoC removed the language from the prior statement which said, “if a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate”.

Some more highlights from the report: 

Trade

• Through the recent period of trade upheaval. Governing Council has been proceeding carefully, paying particular attention to the risks and uncertainties facing the Canadian economy.
• Tariffs are having a profound effect on several key sectors, including the auto, steel and aluminum industries. Chinese tariffs on canola, pork and seafood, new US tariffs on copper, and higher US tariffs on softwood lumber will spread the direct impacts further.
• After remaining resilient to sharply higher US tariffs and ongoing uncertainty, global economic growth is showing signs of slowing.

Economy

• The Bank will continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information.
• There were some signs of resilience: consumption was stronger than expected in the second quarter and housing activity increased.
• Canada’s GDP declined by about VA% in Q2, as expected, with tariffs and trade uncertainty weighing heavily on economic activity.
• Exports fell by 27% in Q2, a sharp reversal from 01 when Cos. were rushing orders to get ahead of tariffs.
• Business investment also declined in Q2, while consumption and housing activity both grew at a healthy pace.
• In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending.

Inflation:

• Preferred measures of core inflation have been around 3% in recent months, but on a monthly basis the upward momentum seen earlier this year has dissipated.

Ahead:

• Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity.
• Governing Council is proceeding carefully, with particular attention to the risks and uncertainties.
• GC will be assessing how exports evolve in the face of US tariffs and changing trade relationships.

In summary: the BoC cut rates by 25bps as expected, with Governor Macklem noting a “clear consensus” to ease policy. The accompanying statement stated that the reduction was appropriate given the weaker economy and fewer upside risks to inflation. Additionally, the board judged that a reduction in the policy rate was appropriate to better balance the risks. On the trade front, policymakers remain cautious over the risks stemming from US tariff actions. Moving forward. The Bank will continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information.

In immediate kneejerk response, the USDCAD rose modestly from 1.3760 to a session high of 1.3770 before retracing some of the move with much of the decision in line with expectations.