• Bank of Canada (BoC) has cut rates by 25 basis points for a third straight time.
• Canadian dollar edged higher in response.

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The Bank of Canada lowered rates on Wednesday by 25 basis points, lowering its key interest rate to 4.25%. The move was widely expected and the Canadian dollar’s reaction was muted.

The BoC has now lowered interest rates at three consecutive meetings, the first major central bank to do so since the rate-tightening cycle began. Major central banks have pivoted from a “higher for longer” stance now that inflation has fallen significantly.

Bank of Canada Cuts in Response to Lower Inflation 

The BoC has largely won the tenacious battle against inflation, and this has enabled the central bank to continue trimming rates in an effort to guide the economy to a soft landing, in which inflation remains declines without the labor market crashing. Inflation has remained within the BoC’s target band of 1% to 3% for seven straight months. In July, inflation fell to 2.5% year-on-year, down from 2.7% in June.

Like the Federal Reserve, BoC policymakers have shifted their focus from inflation to employment. Canada releases the August employment report on Friday and the release will be an important factor in the rate decision at the October meeting.

In his press conference following the meeting, BoC Governor Macklem said that if inflation continues to ease as expected, “it is reasonable to expect further cuts”. Is a 50-basis point cut in the cards? The BoC has moved cautiously so far and Macklem said that an oversize cut was possible if inflation became “significantly weaker than expected”. Macklem reiterated that the Bank would make its rate decisions based on the data.

The Federal Reserve is poised to lower rates at its meeting on September 18 and is expected to deliver a series of rate cuts. The BoC wants to stay in sync with the Federal Reserve so that rate cuts do not put strong pressure on the Canadian dollar, which means that the BoC will be “looking over its shoulder” to see where the Fed is headed before the BoC makes further cuts.

Canadian Dollar Edges Higher, Stock Market Declines after BoC Rate Cut 

The USD/CAD currency pair didn’t show much reaction to the BoC rate cut, as the markets had priced in this move. The Canadian dollar rose 0.20% in the aftermath of the rate decision and is almost unchanged early on Thursday.

The S&P/TSX Composite index, the benchmark Canadian stock market index, showed no reaction to the BoC rate decision and closed on Wednesday down 1.69 points (0.0073%) at 23,040.

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