Inflation is less of a threat, but the economy still needs a boost

This decision on September 4 marks the third consecutive rate cut by the BoC since June Opens a new window.. Although inflation is currently sitting slightly higher than the 2% target rate, it’s less of a threat for the Canadian economy. However, economic growth still needs a boost.

As expected and hoped, total inflation continues to slow and reached 2.5% as of the last reporting in July. However, there’s still some work to do. High shelter price inflation is the biggest contributor to total inflation, but that too is starting to slow. Although the Canadian economy grew by 2.1% in Q2, preliminary indicators suggest economic activity was soft throughout June and July. The labour market continues to slow and wage growth remains elevated relative to productivity.

Diana Li, Associate Portfolio Manager, Global Fixed Income at CIBC Asset Management says the BoC’s decision to cut rates again was two-fold. “Headline and core inflation continue to ease and it helps prevent further spreading of weakness in the economy. The rate cut acts as a guard against further deceleration in the Canadian economy. In the July Monetary Policy Report, the BoC originally expected 2.8% gross domestic product (GDP) growth for Q3, but recent data indicates that growth is likely only going to be 1% to 1.5%.” 

As expected, the BoC took the more cautious approach today, says CIBC Capital Markets Opens a new window.. The quarter point cut still leaves rates above where they will have to head to get the economy really moving again. CIBC Capital Markets believes the BoC will leave the door open for possible larger rate cuts later this year and expects two more 25 bps rate cuts by the end of 2024. 

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