Bank of Canada cuts rates by 25 bp, signals further easing

The Bank of Canada (BoC) cut its overnight rate target by 25 basis points to 4.25% today, marking the second consecutive rate cut in its policy tightening cycle. This result was widely expected, as discussed in our Event Guide.

In its statement, the BoC noted that:

• The global economy expanded by about 2.50% in the second quarter, in line with July projections
• Canada’s economy grew 2.1% in Q2, slightly stronger than forecast
• Inflation fell further to 2.5% in July, with measures of core inflation averaging around 2.5%
• High shelter price inflation remains the largest contributor to headline inflation, but is beginning to slow

Link to September BoC Statement

In his press conference, BoC Governor Tiff Macklem made several key points:

• The risk of inflation becoming too weak is now factored into rate decisions
• Rate cuts will help ease pressure on households ‘feeling the pinch of higher rates’
• The economy must grow above 2%
• There is “enough weakness in the economy” to bring CPI to the 2% target.
• BoC is ‘ready’ to take a ‘bolder step’ on rate cuts if necessary

Macklem added: “With overall inflationary pressures continuing to ease, the Governing Council decided to cut the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while increases in the prices of shelter and other services keep inflation up.”

TL;DR: The Bank of Canada has cut rates by 25bps and has signaled a willingness to ease more aggressively if necessary, with a focus on balancing inflation and growth risks.

Link to September BoC Press Conference

Market reactions

CAD chart overlay against major currencies by TradingView

Despite the cut, the initial reaction to the BoC statement at 09:45 ET saw the Canadian dollar briefly strengthen across the board, signaling a “buy the rumour, sell the news” reaction, somewhat expected given the selling pressure on the Loonie which started in the London session and led to the event.

However, this was quickly reversed against most of the majors before the start of the next hour. This likely reflects a combination of interest rate cuts and the broad risk-averse environment seen in markets this session.

The start of the BoC press conference at 10:30 a.m. triggered another very short round of CAD strengthening, but as the press conference progressed, the Canadian dollar’s performance diverged across currency pairs.

It held and extended gains against some currencies (notably AUD, GBP and NZD) while losing ground against others (notably JPY and CHF), signaling that the weight of overall market sentiment has taken the lead in the Loonie’s behavior .