The Bank of Canada has cut its policy interest rate for the third-consecutive time on Wednesday, September 4, signalling that more cuts are ahead, if the economy slows more sharply in the months ahead.

This third-consecutive rate cut was widely expected by economists and brings the central bank’s benchmark interest rate to 4.25 per cent. Today’s decision marks the first time since the global financial crisis in 2009 that the Bank of Canada has cut rates at three meetings in a row.

Bank of Canada Governor, Tiff Macklem, in prepared remarks in Ottawa this morning says, “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.”

GDP outturn beats bank’s forecast

The rate cut comes as Canada’s gross domestic product (GDP) beat the bank’s own forecast with 2.1 per cent growth in the second quarter but GDP for the month and an early estimate for July were flat. The unemployment rate has climbed to 6.4 per cent and hiring remains soft.

“As inflation gets closer to target, we want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the two per cent target,” Macklem declares.

Headline inflation slowed to 2.5 per cent in July and measures of core inflation, the preferred measures the bank looks at when making its policy decisions, have averaged around the same. 

The bank says shelter inflation, which is affected by higher interest rates, remains the largest contributor.

For the central bank governor, “shelter inflation is still much too high, but it looks like it is starting to roll over, it’s starting to come down. To get back to the inflation target, we’re going to need to see some easing in shelter price inflation, so that is something we’re looking to continue.”

Economists are predicting the Bank of Canada will continue cutting its interest rate for the remainder of the year and into 2025 with the rate falling to between 2.25 and 3.25 per cent by the end of next year. When asked whether a 50 basis point cut is under consideration by the Bank of Canada, Macklem did not rule out the possibility.

“We will be assessing the data as it comes out, if we need to take a bigger step, we’re prepared to take a bigger step,” Macklem says noting, “at this point, 25 basis points looked appropriate.”