Bank Of Canada Cuts Rates, Signals More: What Economists Said

(RTTNews) - The Bank of Canada on Wednesday decided to lower interest rates by 25 basis points, citing continued evidence that underlying inflation is slowing, and signaled more easing while acknowledging risks to the outlook.

The Canadian central bank reduced its target for the overnight rate to 4.75 percent, in line with expectations.

"With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive," the bank said.

"If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 percent target continues to increase, it is reasonable to expect further cuts to our policy interest rate," Governor Tiff Macklem said in his opening statement to the post-decision press conference.

With the first rate cut in four years, the Bank of Canada became the first G7 central bank to cut interest rates in the current cycle that saw major central banks adopting aggressive tightening to battle runaway inflation in the post-pandemic era.

Here is how economists' reacted -

ING: Weak growth, falling inflation and rising unemployment point to a further 75bp of cuts this year with the policy rate hitting 3.5 percent in Q1 2025, economists at ING said.

"...but we are doubtful on back-to-back moves at the July meeting," they said.

"The Canadian dollar is likely to remain under pressure," they added.

Wages are cooling amid the build-up of slack in the labor market, household debt service ratio is at a record high 15 percent, and with rising unemployment, the risk of rising loan delinquencies is very real, ING economists said. This would heighten the chances of a potential recession, they added.

Further, three consecutive monthly declines in retail sales is a cause for concern given the strong immigration growth, economists said.

Oxford Economics: "Today's decision leaves our forecast for the path of rate cuts unchanged, and we still anticipate a moderate recession in Q2 and Q3 this year will lead the Bank to cut the policy interest rate to 4.25% by December 2024," economist Cassidy Rheaume said.

The impact of past interest rate hikes has yet to fully hit households, and mortgage renewals at higher rates are likely to be a key driver of recession this year, the economist observed.

"Therefore, today's decision to cut interest rates will slowly relieve highly indebted Canadian households," Rheaume said.

Lower house prices and falling mortgage rates in coming months will help reduce the stubbornly high shelter price inflation that is causing concern for the bank, the economist said.

"As inflation continues to slow towards the 2 percent target, we expect the BoC will gradually lower the policy rate by 25 bps every second meeting to 2.25 percent by late 2026," Rheaume added.