• The Bank of Canada has cut rates by 25 basis points to 4.50%, but the Canadian dollar showed only a muted response to the rate cut.
• The Bank of Canada lowered rates on Wednesday by 25 basis points, bringing the key interest rate to 4.50%. Ahead of the meeting, the markets had priced in a rate cut at around a 90% probability, so the move was widely expected, and the Canadian dollar showed little reaction to the decision.
• The BoC has now lowered interest rates in back-to-back meetings, the first major central bank to do so since the rate-tightening cycle, with the exception of the Swiss National Bank.

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Canada’s economic data supported the rate cut decision. Headline and core CPI remain above the BoC’s 2% target but are within the ‘comfort range’ of inflation between 1% and 3%. In June, CPI posted a decline of 0.1% month-on-month, its first decline since December 2023. Also, the Canadian labor market, which has remained resilient despite the steep interest rate trajectory, is showing signs of cracking. The unemployment rate jumped to 6.4% in June, compared to 5.7% at the start of the year.

Central bank policy makers are feeling confident about inflation, and this has allowed it to slash rates by 50 basis points since June. The BoC has forecasted that the downtrend in inflation will continue in the second half of the year and that inflation will fall back to the 2% target by 2025.

What’s next for the BoC? Governor Macklem said after the meeting that if inflation continues to fall as the Bank expects, “it is reasonable to expect further cuts in our policy interest rate”. This is a strong signal that further rate cuts are coming, barring any unpleasant surprises from inflation.

Still, it looks like the BoC may have to take a break in its new rate-cutting stance. The BoC doesn’t want to get to ahead of the Federal Reserve, which is yet to lower rates in the current cycle. The reason is that unilateral cuts by the BoC widens the US/Canada rate differential and would further weaken the struggling Canadian dollar.

Canadian Dollar Edges Lower, 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 eased 0.17% on Wednesday and is down by another 0.17% today. 

The S&P/TSX Composite index, the benchmark Canadian stock market index, fell after the rate decision and closed on Wednesday down 174 points (0.76%) at 22,639.

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