The Bank of Canada proceeded with its third consecutive reduction in interest rates. Its prime lending rate fell to 4.25%. The 25 basis point rate cut was widely expected by the market, given the continued weakening of the economy and subdued inflation.
In his written remarks, governor Tiff Macklem said the central bank’s decision reflected two considerations.
“First, headline and structural inflation continued to ease as expected. Second, as inflation approaches target, we want to see economic growth pick up to absorb the slack in the economy so that inflation can sustainably return to the 2% target».
With an eye on the economy
The Bank of Canada noted that while the economy grew at a faster-than-expected pace in the second quarter, preliminary data for June and July showed economic activity slowed.
Macklem reiterated that if inflation continues its downward path it is “reasonable” to expect more rate cuts.
Canada’s annual inflation has been below 3% for months, reaching 2.5% in July. As the central bank moves closer to its inflation target, the governor stressed the importance of balancing upside and downside risks ahead.
“There is a risk that the upward forces in inflation will be stronger than expected,” he said characteristically. “At the same time, with inflation moving closer and closer to target, we must increasingly guard against the risk of the economy being too weak and inflation falling too far.”
