The Bank of Canada has reduced its interest rate by 25 basis points to 4.50% in a move designed to combat a slowing economy. This is a significant reduction from the previous rate of 4.75 percent. The BoC has now reduced its interest rate for the second time in a row, after reducing it by 25 basis points last June.
This decision is a response by the central bank to economic challenges that continue, such as reduced inflation and slowed economic growth.
This announcement by the BoC shows its determination to navigate a complicated economic climate marked by weakened inflationary pressures, and slower consumer spending.
In a statement, the BoC said:
The Governing council decided to lower the interest rate policy by 25 basis points. With inflation moving closer to 2% and broad price pressures continuing their downward trend, they expect that prices will continue to fall. The ongoing excess supply has lowered inflationary pressures.
Revised Economic Projections
In addition to the rate reduction, the BoC revised down its GDP projections, reflecting lower demand and consumption, and reduced motor vehicle and travel abroad.
The Canadian economy has grown, but it is still weak in comparison to the population increase. Spending by households has remained low. The pent-up desire for new cars, travel and other items is diminishing. Many families set aside a larger portion of their earnings for debt repayments, which leaves less for discretionary expenditures,” said the governor.
In April, the central bank had predicted a growth rate of 1.5% for 2024. This is now down to 1.2%.
The Bank of Canada forecasts a GDP growth rate of 2.4% by 2026, but 1.2% for 2024. “The strengthening economy will slowly absorb the excess supply from 2025 to 2026,” said BoC.
The BoC is still optimistic about inflation this year. It expects it to hover at around 2,6%, and then return sustainably to the target of 2% in the second half 2025.
Governor Macklem says that further rate reductions could be forthcoming
Tiff Macklem, Governor of Canada, said that there is still room for growth in the Canadian economy without creating inflationary pressures.
If the inflation trend continues to be downward, he suggested further rate reductions could be in store.
The central bank has also stated that they will be cautious and closely monitor economic data in order to make their decisions. Macklem stated in prepared remarks:
If inflation remains broadly within our expectations, we can expect to see further reductions in the policy rate. Timing will be determined by how these forces are playing out. We will take our monetary decisions “one at a time”.
Currency impact and market reaction
This announcement caused the Canadian Dollar to depreciate, which fell to its lowest level in three months against the US Dollar.
USD/CAD neared 1.3800, reflecting the market’s anticipation of a rate cut.
This reaction shows how sensitive currency markets are to changes in central bank policies and forecasts of economic growth.
Economic data and inflation
The Bank of Canada’s forecast for 2.9% inflation in the first half 2024 has been revised down to 2.7%.
The CPI has fallen by 0.1% month-over-month. This is the first decline since December.
The July rate reduction was justified by the slowdown of inflation and the loosening labour market. Canada has lost over 1,400 jobs since June, while the unemployment rate rose to 6.4%.
Market outlook and technical analysis
Dhwani Mhta is the Asian Session lead analyst at FXStreet. He provided some technical insight into the USD/CAD pairing, noting its position at 1,3775, the highest in the last six weeks.
In a report on FXStreet, Mehta said:
The USD/CAD is at its highest level since six weeks, at 1,3775 ahead of the BoC’s showdown. The 14-day Relative Strength Index is still above 50, and a Bull Cross continues to form. Buyers are waiting for the next upward leg. “The 21-day Simple Moving Average is about to cross the 50-day SMA on an upward trend, and if this occurs daily will confirm a bullish crossing.”
Mehta noted that the key technical indicators indicate potential for more upside. The 21-day Simple Moving Average is on the brink of crossing over the 50-day SMA – a sign of a bullish direction.
On a new upward trend, USD/CAD may initiate a further advance towards the 1.3846 highs in 2024. Before that happens, it is important to take out the 1.3800 resistance. Buyers will then aim for the round 1.3900 level. In contrast, the SMAs of 21 and 50 days are converging at 1.3680. If the price falls below this level, the SMA 100 of 1.3630 will be put to the test. “The 200-day SMA at 1.3595 is the last defense line for USD/CAD optimists.”
As new information becomes available, this post Bank of Canada lowers key interest rate by 4.50% to reduce growth in 2024 amid falling inflation and may change.
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