Last week, the institution announced a new reduction in its target for the overnight interest rate, lowering it by 25 basis points, now set at 4.25%. This was the third consecutive cut made by the Canadian central bank, in an effort to stimulate the economy and curb inflationary pressures affecting various sectors.
A few days after this decision, a monthly labor market report revealed an increase in the unemployment rate, rising from 6.4% to 6.6%. Although this increase is relatively small, it could signal a cooling in the pace of economic recovery, reinforcing the possibility that the Bank of Canada may adopt an even more aggressive stance on rate cuts if labor market slowdown and other economic indicators intensify.
The expectation is that if unemployment continues to rise and economic growth loses momentum, the central bank could make further cuts more quickly to reignite the economy. Experts point out that in scenarios of economic slowdown, a more flexible monetary policy may be necessary to encourage consumption and investment, which are essential elements for sustainable growth.
On the other hand, the Bank of Canada needs to balance this monetary easing policy with the risk that excessive rate cuts could fuel inflation, a problem that the global economy has faced in recent years. Thus, the decision to accelerate or not the cuts depends on a careful analysis of the inflationary impacts and the need to support the economy.
This uncertain scenario draws the attention of investors and companies to the next moves of the Canadian central bank, which seeks to adjust its policy according to evolving economic conditions.
Deeper rate cuts in Canada may be justified if economic growth, both domestically and globally, shows more pronounced signs of weakness, said Bank of Canada Governor Tiff Macklem. During a speech in London focused on international trade, Macklem indicated that there is room for further rate reductions, suggesting the possibility of a half-point cut as early as October. He acknowledged that recent data, especially employment and Gross Domestic Product (GDP) indicators, have shown fragility, reinforcing the need for caution in the central bank’s upcoming decisions.
The previous week, the Bank of Canada had already made its third consecutive reduction in the overnight interest rate, lowering it by 25 basis points to 4.25%. This series of cuts was mainly motivated by the slowdown in inflation, which fell to 2.5% in July, providing more comfortable room for the central bank to adopt more flexible monetary policies. With inflation returning to controlled levels, the focus now shifts to economic growth, which has shown signs of stagnation, both domestically and globally.
Macklem’s speech made it clear that the central bank is aware of the current economic challenges and is willing to act proactively if necessary. The decline in global economic growth, influenced by several factors such as the slowdown in major economies and the volatility of international trade, has a direct impact on Canada’s performance. As such, adjustments in monetary policy may be essential to protect the economy from a deeper recession.
The expectation of a more significant rate cut in October is being widely discussed among economic analysts. For many, the Bank of Canada’s more flexible stance, coupled with the recent slowdown in inflation, suggests that the monetary authority is willing to use all resources at its disposal to stimulate the economy and keep the country on a path of sustainable growth. However, the central bank also faces the challenge of balancing this strategy with the risks of a new inflationary surge if easing is overdone.
Days after the recent rate cut, the monthly labor market report revealed that Canada’s unemployment rate rose from 6.4% to 6.6%. This is the highest unemployment rate since May 2017, excluding the Covid-19 pandemic period.
During a Q&A session with a business audience, Bank of Canada Governor Tiff Macklem commented on the labor market situation and the central bank’s expectations. “We currently have some relief in the labor market. With inflation approaching our target, what we really want to see is an acceleration in economic growth. We want to see a strengthening in consumer spending,” Macklem said.
He explained that while inflation is adjusting according to established targets, the Bank of Canada’s priority is to stimulate robust economic growth. The central bank’s strategy aims to promote a more favorable environment for increased consumer spending and the boost of economic activities, which may contribute to a more solid and sustainable recovery.
The rise in the unemployment rate, although modest, raises concerns about the pace of economic recovery. With rate cuts and inflation at more controlled levels, the Bank of Canada is taking measures to foster a more vigorous economic expansion. Macklem highlighted that the goal is to create conditions that encourage growth and economic stability, aligning with the central bank’s long-term goals.
The Bank of Canada initially forecast an annualized growth of 2.8% for the third quarter of 2024. However, Governor Tiff Macklem acknowledged that this forecast may be at risk, given that recent economic indicators suggest weaker output in July and August.
Private sector economists, such as Royce Mendes of Desjardins Securities, project that third-quarter growth could be closer to 1%, well below the central bank’s initial forecast. This adjustment in expectations reflects growing concerns about the economic slowdown, which is affecting growth forecasts for the period.
Macklem commented that if the risks of an economic slowdown materialize and inflation continues to show signs of weakness, the Bank of Canada may consider accelerating rate cuts. He emphasized that the central bank is prepared to adjust its monetary policy according to evolving economic conditions, seeking to support economic recovery and maintain financial stability.
