Bank of Canada cuts key interest rate to 4.50% and lowers 2024 growth forecast amid cooling inflation

In a strategic move to address a cooling economy, the Bank of Canada (BoC) has lowered its key interest rate to 4.50%, a reduction of 25 basis points from its previous rate of 4.75%. This adjustment marks the BoC’s second consecutive rate cut, following a similar decrease in June.

The decision reflects the central bank’s response to ongoing economic challenges, including reduced inflation and slower economic growth.

The BoC’s announcement underscores its commitment to navigating a complex economic environment marked by weakening inflationary pressures and slower consumption.

The BoC in a note, said:

Revised economic projections

Alongside the rate cut, the BoC has revised its GDP projections downward, reflecting lower consumption and reduced demand for motor vehicles and foreign travel.

The central bank now forecasts a 1.2% growth rate for 2024, down from the 1.5% predicted in April.

"Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026," the BoC, said.

Despite these adjustments, the BoC remains optimistic that inflation will hover around 2.6% this year, with a sustainable return to the 2% target expected in the second half of 2025.

Further rate cuts could happen, says Governer Macklem

Governor Tiff Macklem emphasized that the Canadian economy still has room to grow without igniting inflationary pressures.

He suggested that further rate cuts could be on the horizon if inflation continues its downward trend.

However, the central bank also indicated that it will take a cautious approach, closely monitoring economic data to guide its decisions. In prepared remarks, Macklem said:

Market reaction and currency impact

The announcement triggered a depreciation of the Canadian Dollar (CAD), which dropped to a three-month low against the US Dollar (USD).

The USD/CAD exchange rate neared the 1.3800 mark, reflecting market anticipation of the rate cut and the subsequent volatility.

The reaction underscores the sensitivity of currency markets to central bank policy shifts and economic forecasts.

Inflation and economic data

Inflation in Canada has shown signs of cooling, with the Consumer Price Index (CPI) rising by 2.7% in June, below the BoC's earlier forecast of 2.9% for the first half of 2024.

Month-over-month, the CPI fell by 0.1%, marking the first deceleration since December.

This slowdown in inflation, coupled with a loosening labor market, where Canada lost 1,400 jobs in June and saw the unemployment rate rise to 6.4%, bolstered the case for the July rate cut.

Technical analysis and market outlook

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, provided technical insights into the USD/CAD pair, noting that it is positioned at the highest level in six weeks, at 1.3775.

In a report on FXStreet, Mehta said: