The Bank of Canada cut its policy rate for a third consecutive time on Wednesday, lowering it by 25 basis points to 4.25% in a decision that was widely anticipated by markets.

In providing reasons, the Bank of Canada’s governor, Tiff Macklem, stated that both headline and core inflation (which excludes food and energy) continue to ease as expected. He declared that “as inflation gets closer to target, we want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target.”

The decision did not come with an updated economic forecast, which is instead scheduled for October 23.

Here are points made by the Bank of Canada in the press release following its decision on September 4, 2024:

  • The Canadian economy grew by 2.1% in the second quarter, led by government spending and business investment.
  • The labour market continues to slow. However, the Bank said that wage growth remains elevated relative to productivity.
  • High shelter price inflation is still the largest contributor to total inflation, but is starting to slow, the Bank said. Inflation also remains elevated in some other services.
  • According to the Bank of Canada’s assessment, the economy is operating in excess supply, putting downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. As a result, the central bank “is carefully assessing these opposing forces on inflation.”
  • The Bank concluded by mentioning that “monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook.”

Total inflation is now at 2.5% while core inflation is at 2.7%, both down a few basis points over the last few months. However, goods inflation remains abnormally low while services inflation is stuck between 4% and 5%.

These contrasting scenarios in goods inflation and services inflation certainly create an unusual picture, compounded by the challenge of weak productivity in the services sector. Eventually, such a contrast could require a pause in policy rate cuts should the disinflation process show signs of running out of steam. However, new inflation data will need to be collected before this happens.

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