The Bank of Canada announced a second consecutive interest rate cut and may further cut interest rates in the future

On Wednesday, the Bank of Canada announced a 25 basis point cut in its benchmark interest rate from 4.75% to 4.5%, the second consecutive rate cut, in line with market expectations. The central bank said further rate cuts are possible in the future if inflation continues to slow.

The current interest rate is the lowest since June 2023. Last month, the Bank of Canada cut its interest rate from 5% to 4.75%, the first rate cut in more than four years.

Bank of Canada Governor Tiff Macklem said the decision was based on economic data showing a weak job market, oversupply in the economy and continued decline in inflation. He noted: "We are increasingly confident that the elements to return inflation to target levels are in place."

Since the start of the rate hike cycle in March 2022, inflation has fallen from a peak of 8.1% in June 2022 to 2.7% in June 2024, despite a slight rebound in May. "Looking ahead, we expect inflation to slow further," Macklem said. However, he also mentioned that the return of inflation to the 2% target may not be a straight line. "Overall weakness in the economy is pulling inflation down. At the same time, price pressures in housing and some other services are pushing inflation up."

While the central bank is increasingly confident that inflation is back on target, Macklem noted that opposing forces in the economy could affect how quickly price growth slows. "If inflation continues to move broadly in line with our expectations, then it is reasonable to expect further cuts in the policy rate," he said. "The timing depends on how we view these opposing forces."

Many economists and big banks expect the central bank to cut rates as many as four times by the end of 2024. The pace of rate cuts could be influenced by the actions of other central banks, such as the Bank of England and the Federal Reserve. Last month, the Bank of Canada became the first G7 central bank to cut rates since the outbreak of the pandemic.

The central bank expects overall inflation pressures to continue to ease, with the core inflation measure the central bank monitors, which is currently persistently below 3%, expected to slow to around 2.5% by the second half of 2024. In its Monetary Policy Report, the central bank highlighted that inflation is being driven by high housing costs, driven by rent and mortgage interest costs, and service sectors that are closely tied to wages, such as restaurants and personal care. The report warned that "housing market imbalances" will continue to put upward pressure on inflation through most of the forecast period.

"We are carefully assessing the downward impact of persistent excess supply on inflation, as well as pressures from housing and other services, which are pushing inflation higher," Macklem said. "Monetary policy decisions will be based on incoming information and our assessment of its impact on the inflation outlook."