Due to sluggish economic growth and slow inflation, most economists had long anticipated the Bank of Canada's move to cut rates by 25 basis points. Governor Tiff Macklem expressed optimism about the easing of inflation and hopes to use this opportunity to stimulate the economy for a rebound. He also emphasized that if inflation continues to decline as expected, further rate cuts would be “reasonable.”
During a conversation with reporters, Macklem revealed that Canada's economy grew by 2.1% in the second quarter this year, slightly higher than the central bank's July prediction, mainly benefiting from increased government spending and business investment. He stated: “This is a significant rebound against the backdrop of near-zero growth in the second half of 2023.” The central bank expects the economy to continue expanding steadily in the second half of this year, with further easing of inflation pressures. Macklem reiterated the bank's commitment to maintaining an inflation rate of 2% and ensuring it stays at that level. He noted that only when inflation remains around 2% can the economy operate stably.
Currently, Canada's inflation rate is gradually approaching the central bank's target, reaching 2.5% in July. However, the labor market remains a focal point of the central bank. Data shows that the unemployment rate rose to 6.4% in June and remained unchanged in July. Macklem pointed out that the increase in unemployment is particularly significant among young people and new immigrants. He added that although layoffs in businesses are relatively mild, recruitment activities have slowed down markedly, and this labor market weakness is expected to suppress wage growth.
According to the central bank's data, global economic growth in the second quarter of 2024 is about 2.25%, with the U.S. economy performing beyond expectations, mainly driven by consumer spending, though its labor market also shows signs of slowing.
Mortgage specialist Penelope Graham stated that she expects Canada's rates to fall to 3.75% by the end of the year. In an email, she noted that the latest inflation data from Canada and the U.S. strengthens the market's anticipation of continuous rate cuts by the Bank of Canada in 2024 and 2025. She predicts that the bank may implement three more rate cuts of 25 basis points each by the end of this year, bringing the overnight lending rate to 3.75%, the lowest level since December 2022.
The market generally expects the central bank to cut rates again at the interest rate meeting at the end of October. The next rate adjustment is expected to be announced on October 23.
