The quarter-percentage-point reduction was widely expected by forecasters, given ongoing softness in the economy and easing inflation.
In his opening remarks on Wednesday, governor Tiff Macklem said the central bank’s decision to bring its key lending rate down to 4.25% was motivated once again by continued progress on inflation and the need for growth to pick up again.
While the announcement carried no surprises, the governor signalled a willingness to change the pace of cuts, if circumstances warrant.
“If those upward forces in inflation proved to be stronger than we expected, or if there’s significantly less slack in the economy than we assess, yes, it might be appropriate to slow the pace of declines,” Macklem said.
“On the other hand, if the economy was significantly weaker, if inflation was significantly weaker than we expected, yes, it could be appropriate to take a bigger step, something bigger than 25 basis points.”
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Economic activity slowed in June and July
The Canadian economy grew at a faster pace than expected in the second quarter, but preliminary data pointed to weak activity in June and July.
CIBC chief economist Avery Shenfeld noted that financial markets had placed small odds on a half-percentage-point cut, but the central bank opted to take a balanced approach.
“It’s said that victory goes to the bold, but the Bank of Canada went with the more cautious approach of yet another quarter point rate cut, leaving rates still well above where they will have to head to get the economy really moving again now that inflation is less of a threat,” wrote Shenfeld.
Looking ahead, Macklem reiterated that if inflation continues to ease as expected, it is “reasonable” to expect more rate cuts.
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