Given the persistently weak economy and falling inflation, this quarter-percentage point decline had been widely expected by forecasters.
In his opening remarks on Wednesday, Governor Tiff Macklem said the central bank’s decision to chop its benchmark rate of interest to 4.25% was again motivated by continued progress on inflation and the necessity to revive growth.
While the announcement got here with no surprises, the governor signaled that he was willing to vary the pace of cuts if circumstances required it.
“If these upward forces in inflation prove stronger than expected, or if the economic slump turns out to be significantly less severe than we estimate, then it may indeed be appropriate to slow the pace of the decline,” Macklem said.
“On the other hand, if the economy were significantly weaker, if inflation were significantly lower than expected, then it might actually be appropriate to take a larger step, something more than 25 basis points.”
Economic slowdown in June and July
The Canadian economy grew faster than expected within the second quarter, but preliminary data suggested weak activity in June and July.
Avery Shenfeld, chief economist at CIBC, noted that financial markets had given little probability to a half-percentage point cut, however the central bank had opted for a balanced approach.
“They say victory belongs to the brave, but the Bank of Canada has taken the more cautious approach and cut the benchmark interest rate by another quarter of a percentage point. That still leaves rates well above the level that would need to be reached to get the economy moving again now that inflation is no longer such a major threat,” Shenfeld wrote.
Looking ahead, Macklem reiterated that it will be “reasonable” to expect further rate cuts if inflation continues to say no as expected.
