UPDATE 2 - Bank of Canada reduces policy rate by 25 basis points to 4.25%

ADDS COMMENTS FROM GOVERNOR TIFF MACKLEM

By Ovunc Kutlu

ISTANBUL (AA) - The Bank of Canada announced Wednesday it reduced its policy rate by 25 basis points to 4.25%, marking the third rate cut in more than four years.

The target for the overnight rate was lowered to 4.25%, with the bank rate at 4.5% and the deposit rate at 4.25%.

The move is the third rate cut by the central bank since March 2020 when it lowered the policy rate by 25 basis points in response to economic conditions caused by the coronavirus pandemic.

"The global economy expanded by about 2.5% in the second quarter," the bank said in a statement. "In Canada, the economy grew by 2.1% in the second quarter, led by government spending and business investment.

"This was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July," it added. "The labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity."

The Bank of Canada said inflation in the country slowed further to 2.5% in July, adding that its preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norm.

The central bank said high shelter price inflation is still the biggest contributor to total inflation, but it is starting to slow, noting that inflation also remains elevated in some other services.

"Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up," said the statement.

The bank said economic growth in the US was stronger than expected, led by consumption, but the labor market has slowed.

Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft, it added.

China's weak domestic demand weighed on its economic growth, it noted.

The Bank of Canada said its Governing Council is carefully assessing forces on inflation, and monetary policy decisions will be guided by incoming macroeconomic information and its assessment of their implications for the inflation outlook.

The rate cut decision reflects two main considerations, Governor Tiff Macklem told a press conference after the conclusion of the central bank's monetary policy meeting.

"First, headline and core inflation have continued to ease as expected," he said. "Second, as inflation gets closer to target, we want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target."

Macklem said inflation continues to reflect the push and pull of opposing forces -- overall weakness in the economy continues to pull inflation down, but price pressures in shelter and some other services are holding inflation up.

"At the same time, the downward pressure coming from excess supply in the economy remains," he added.

The governor said if inflation continues to ease broadly in line with the central bank's July forecast, it is reasonable to expect further cuts in its policy rate.

He noted that consumer inflation eased further to 2.5% in July, while it is expected to ease further in the months ahead.

However, "shelter price inflation is still too high. It remains the biggest contributor to overall inflation, despite some early signs of easing," he said.

"At the same time, with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much."

The Governing Council is determined to get inflation down to its 2% target, and it wants it to stay there, he added.

Macklem said there was a strong consensus among members of the Governing Council about a 25 basis points of rate cut, rather than 50 basis points.​​​​​​​