Bank of Canada Cuts Interest Rates

Steady
Supply
of
Workers
Cooling
Canadian
Wage
Pressures

The
decision
comes
after
increasing
investor
doubts
over
recent
weeks
about
a
June
rate
cut,
with

growth
in
the
Canadian
economy
picking
up,
and
from
earlier
this
year,
with

concerns
about
worker
productivity
and
the
impact
on
inflation. But
most
recently,
Macklem
is
beginning
to
notice
an
increase
in
the
supply
of
workers,
which
helps
lower
wages.
“In
the
labour
market,
businesses
are
continuing
to
hire
workers.
Employment
has
been
growing,
but
at
a
slower
pace
than
the
working-age
population,”
he
said.
“This
has
allowed
the
supply
of
workers
to
catch
up
with
job
vacancies.
Elevated
wage
pressures
look
to
be
moderating
gradually.”

While
reduced
wage
pressures
will
help
to
cool
high
prices,
today
the
Bank
reminded
Canadians
that
inflation
remains
above
the
2%
target
and
housing
prices
remain
high,
but
noted
that
we’re
headed
in
the
right
direction.
“Total
consumer
price
index
inflation
has
declined
consistently
over
the
course
of
this
year,”
said
Macklem,
“and
indicators
of
underlying
inflation
increasingly
point
to
a
sustained
easing.
This
all
means
restrictive
monetary
policy
is
working
to
relieve
price
pressures.
And
with
further
and
more
sustained
evidence
underlying
inflation
is
easing,
monetary
policy
no
longer
needs
to
be
as
restrictive.”

What
Does
This
Mean
for
the
Canadian
Economy?

While
Canadian
investors
may
celebrate
today’s
decision,
it’s
worth
keeping
an
eye
on
the
economy,
says
Travis
Shaw,
senior
vice
president,
sector
lead
global
sovereign
ratings
at
Morningstar
DBRS.
“The
BoC
was
clearly
concerned
about
the
slowdown
in
domestic
activity,
while
still
acknowledging
that
consumption
remains
strong
and
housing
activity
is
picking
up,”
he
said.
“By
acting
now,
the
BoC
is
trying
to
ensure
monetary
policy
isn’t
too
restrictive
for
too
long,
and
still
allows
for
growth
in
the
economy
provided
inflation
continues
to
moderate
toward
the
2%
target.”

Contributing
factors
to
the
moderating
inflation
include
a
lackluster
job
market
and
unemployment
hovering
around
6%
(despite
the
April
jobs
number
which
was
the
highest
in
more
than
a
year),
says
Michael
Constantino,
CEO
at
Webull
Canada.
“For
homeowners,
lowering
rates
may
bring
some
relief
to
households
with
variable-rate
mortgages.
The
concern
is
that
cuts
could
signal
a
rush
to
market
by
people
waiting
on
the
sidelines,
which
could
in
turn
drive
home
prices
even
higher.”

From
a
bond
market
perspective,
Shaw
noticed
that
the
swap
market
had
priced
in
an
80%
chance
of
a
cut
prior
to
the
announcement.
Looking
ahead
in
the
long
term,
it’s
something
for
investors
to
keep
an
eye
on.
“Any
reduction
in
rates
is
in
response
to
a
slowing
economy,
so
that
is
something
to
watch
cautiously,”
says
Shaw.

The
change
in
direction
for
Canada’s
central
bank
is
also
a
noteworthy
event
at
an
international
level.
“The
Bank became
the
first
G7
central
bank
to
begin
its
easing
cycle
today,”
notes Dustin
Reid,
chief
strategist,
fixed
income
at
Mackenzie
Investments.
And
while
the
Bank’s
statement
today
was
generally
balanced,
it
perhaps
opened
the
door
to
a somewhat
faster
easing
cycle
than
the
market
had
expected
going
into
the
meeting,
said
Reid.

Bank
of
Canada
Spots
Signs
of
Inflation
Relief
in
U.S.

The
Bank
also
continues
to
keep
an
international
perspective,
with
a
focus
on
developments
in
the
U.S.:
“In
the
United
States,
the
economy
expanded
more
slowly
than
was
expected,
as
weakness
in
exports
and
inventories
weighed
on
activity,”
noted

the
Bank’s
announcement
today.
“Growth
in
private
domestic
demand
remained
strong
but
eased.” 

In
the
U.S.,
“In
2024,
we
project
inflation
to
return
to
normal
levels,
in
line
with
the
Federal
Reserve’s
2%
target,”

says
Morningstar’s
Chief
U.S.
Economist
Preston
Caldwell. “The
drop
in
inflation
has
been
driven
principally
by
the
unwinding
of
price
spikes
owing
to
supply
chain
resolutions
and
by
the
slowing
pace
of
economic
growth
because
of
the
Fed’s
tightening.”

While
recent
developments
have
been
concerning,
on
a
long-term
basis,
Caldwell
still
expects
inflation
to
average
1.9%
from
2024
to
2028—falling
just
under
the
Fed’s
2.0%
inflation
target.
“We
still
think
that
the
Fed’s
rate
hikes
executed
thus
far
will
eventually
slow
GDP
growth
sufficiently
and
that
inflation
will
drop
to
2%
(while
avoiding
an
outright
recession).
The
effects
of
these
rate
hikes
are
still
accumulating
throughout
the
economy
as
borrowers
roll
over
to
higher
interest
rates
and
exhaust
their
financial
cushions.”

When
it
comes
to
the
impact
of
rising
costs
and
supply
chains
on
inflation
in
the
U.S.,
Caldwell
says
there’s
help
on
the
way.
“One
indicator
on
the
logistics
side
is
that
there
are
enough
container
ships
set
to
be
delivered
over
the
next
several
years
to
expand
the
current
fleet
by
30%.”
He
also
noted
that
manufacturing
capacity
is
on
the
rise
in
the
U.S.
and
China.

Should
Canadians
Expect
Another
Cut?

With
signs
of
hope
internationally
on
inflation,
back
in
Canada,
the
Bank’s
announcement
today
reflects
a
similar
optimism.
“If
inflation
continues
to
ease,
and
our
confidence
that
inflation
is
headed
sustainably
to
the
2%
target
continues
to
increase,
it
is
reasonable
to
expect
further
cuts
to
our
policy
interest
rate,”
said
Macklem.
“But
we
are
taking
our
interest
rate
decisions
one
meeting
at
a
time.”

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