Notes From the Desk: The Bank of Canada Rate Announcement
The Bank of Canada (BoC) cut rates by 25 bps this morning to 4.5%. While this was expected, the BoC surprised the markets with a more dovish outlook.
The Banks Confidence.
The Bank is becoming more confident that inflation is heading to 2%, as considerable slack remains in the economy.
While there are pockets of inflationary pressure in housing and wages, they feel lower rates will help ease shelter inflation, while a growing pool of available labour will cool wage growth.
The Banks Warning.
The Bank warned Canadians not to read too much into a single CPI number, pointing out that further progress on the 2% goal would likely be uneven.
Our two cents.
Interestingly, the Bank’s forecast for acceleration in growth is based on consumer demand picking up because of lower rates. This suggests to us that the Bank is on a sustained path to lower rates (barring an acceleration in inflation). The bond market is pricing in another 40 bps of rate cuts this year. We think this is too low, and at least two more cuts will be delivered before year-end.
