UPDATE 2 - Bank of Canada reduces policy rate by 25 basis points to 4.5%

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 4.5%, marking the second rate cut in more than four years.

The target for the overnight rate was lowered to 4.5%, with the bank rate at 4.75% and the deposit rate at 4.5%.

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

"The global economy is expected to continue expanding at an annual rate of about 3% through 2026," the bank said in a statement. "While inflation is still above central bank targets in most advanced economies, it is forecast to ease gradually."

The bank said Canada's economic growth "likely picked up" to around 1.5% through the first half of 2024.

"However, with robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, which means excess supply has increased," it said.

The gross domestic product (GDP) growth is forecast to increase in the second half of 2024 and through 2025, according to the bank.

The central bank said it estimates GDP growth of 1.2% in 2024, 2.1% in 2025 and 2.4% in 2026, adding the "strengthening economy will gradually absorb excess supply through 2025 and into 2026."

The Bank of Canada noted that consumer inflation, or CPI, moderated to 2.7% in June, after increasing in May, and added that broad inflationary pressures are easing.

The central bank said its preferred measures of core inflation have been below 3% for several months, while it is expected slowing to around 2.5% in the second half of this year and ease gradually through next year.

The bank said it expects CPI inflation to come down below core inflation in the second half of this year, largely because of base-year effects on gasoline prices, and added "As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year."

"Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up," it noted.

It said household spending in Canada, including both consumer purchases and housing, has been weak.

"There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderating, but remains elevated," it added.

- 'Push-pull of opposing forces affecting inflation'

"Looking ahead, we expect inflation to moderate further, though progress over the next year will likely be uneven," Governor Tiff Macklem told a press conference after the conclusion of the central bank's monetary policy meeting.

"This forecast reflects the opposing forces affecting inflation. The overall weakness in the economy is pulling inflation down. At the same time, price pressures in shelter and some other services are holding inflation up," he explained. "But the push-pull of these opposing forces means the decline in inflation will likely be gradual, and there could be setbacks along the way."

Macklem said the Bank of Canada's decision to lower its policy interest rate a further 25 basis points to 4.5% reflects three key considerations – monetary policy is working to ease broad price pressures, and Canada's economy has more room to grow without creating inflationary pressures.

"Third, as inflation gets closer to the 2% target, the risk that inflation comes in higher than expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected," he added.

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