As projected in our Event Guide, the Bank of Canada (BOC) cut its overnight interest rates by 50 basis points from 4.25% to 3.75% in October. This marked its fourth consecutive rate cut since June.
In its statement, the central bank cheered the inflation hitting the 2% target and the measures of core inflation falling below 2.5%. BOC expects consumer prices to “remain close to the target” with upward and downward pressures roughly balancing out.
The labor market remains a concern, as population continued to grow amidst a modest hiring environment while wage growth remains elevated relative to productivity growth.
Overall, BOC noted that growth may slow in the second half of the year, but expects GDP to “strengthen gradually” as interest rates decline, consumer spending picks up, and population growth eases.
BOC members expect to “reduce the policy rate further” if the economy evolves in line with forecasts. However, the statement emphasized that members will “take decisions one meeting at a time.”
Link to official BOC October monetary policy statement
In its quarterly forecasts, the Bank of Canada projects Q3 2024 growth at 1.5%, which is below the 2.0% GDP growth anticipated for the second half of 2024 in the July outlook. However, it’s expected to reach 2.0% in 2025.
Inflation is now expected to be 1.6% in September 2024, a notable drop from the 2.7% forecasted in July. Consumer prices are now seen staying close to target in the second half of the year, an improvement from the 2.5% forecast in July.
BOC made little changes to labor market expectations, with the unemployment rate remaining around 6.4% to 6.5%. The outlook remains cautious, with excess supply expected to persist as newcomers and youth continue to face higher-than-average unemployment rates amidst reduced worker demand.
Link to official BOC October monetary policy report
In his presser, BOC Governor Tiff Macklem shared that there was a “clear consensus” among members to cut rates by 50 basis points.
Unlike in previous statements where he emphasized the need to bring inflation to target, Macklem emphasized that “we are back to low inflation” and that “risks around our inflation forecast are reasonably balanced.”
Macklem noted:
“Now our focus is to maintain low, stable inflation. We need to stick the landing.”
Link to BOC Governor Macklem’s press conference
Market Reactions
Canadian Dollar vs. Major Currencies: 5-min
Overlay of CAD vs. Major Currencies Chart by TradingView
The Canadian dollar started edging lower near the U.S. session open and saw a fresh and broad-based bearish swing at the BOC’s jumbo rate cut.
However, the Loonie soon bounced, thanks to Macklem’s shift to a less dovish tone in his presser and probably some sell-the-rumor, buy-the-news flows.
While the BOC may still reduce its rates this year, the bar is likely higher for another jumbo rate cut as the BOC shifts its focus to maintaining low inflation rates.
CAD maintained a bullish momentum against “risk” currencies like GBP, AUD, and NZD but also gave up some of its gains against EUR and safe havens CHF, USD, and JPY by the end of the day.