The Bank of Canada has announced it has:
reduced its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. The Bank is continuing its policy of balance sheet normalization.
The global economy expanded by about 2½% in the second quarter, consistent with projections in the Bank’s July Monetary Policy Report (MPR). In the United States, economic growth was stronger than expected, led by consumption, but the labour market has slowed. Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft. Inflation in both regions continues to moderate. In China, weak domestic demand weighed on economic growth. Global financial conditions have eased further since July, with declines in bond yields. The Canadian dollar has appreciated modestly, largely reflecting a lower US dollar. Oil prices are lower than assumed in the July MPR.
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. The labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.
As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2 ½% and the share of components of the consumer price index growing above 3% is roughly at its historical norm. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services.
With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. 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. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.
Darcy Keith in the Globe reports:
The Bank of Canada on Wednesday cut its key policy rate by 25 basis points to 4.25% as expected, while expressing concern that weaker-than-anticipated growth might mean inflation falls too quickly.
Still, some economists said the tone of the bank’s statement was not quite as dovish as it could have been given recent weakness in the economy. And that sentiment is making money markets reluctant to price in rate cuts of more than 25 basis points at any future policy meeting.
The 25 basis point cut on Wednesday itself was well telegraphed ahead of time, and the market reaction reflected that. The Canadian dollar barely budged and Canada’s two-year bond yield was down about 3 basis points – about where it started the North American trading day and in line with the move in the equivalent U.S. Treasury.
…
Here’s how implied probabilities of future interest rate moves stand in swaps markets, according to data from LSEG as of 1013 am ET. The overnight rate now resides at 4.25%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Pre-announcement
Post-announcement
Prime followed:
- TD : Down 0.25% to 6.45%
- CIBC: Down 0.25% to 6.45%
- BNS: Down 0.25% to 6.45%
- RBC: Down 0.25% to 6.45%
- BMO:Down 0.25% to 6.45%
Well, Rob Carrick and Ryan Siever will be mad – nothing on the way up and precious few hopes for the way down:
There’s a case to be made for banks giving borrowers a break when what is expected to be the biggest interest rate hike in 22 years is announced on Wednesday.
A brief flashback to 2015 is required to get the sense of this story. The economy back then was in the opposite shape of what it is now – weak enough to prompt the Bank of Canada to cut its trendsetting overnight rate by 0.25 of a percentage point in January and again in July.
The big banks hijacked part of that rate cut. While the overnight rate fell by a total 0.5 of a point, the banks cut their prime rate by cumulative 0.3 of a point. They held back the rest of the rate cut to build their revenues and profit.
There was a delay in reducing the prime when the Canada Overnight rate dropped 25bp to 0.75% in January 2015 and again when Canada Overnight dropped a further 25bp to 0.50% in July of that year.