MARKET NEWS
Bank of Canada cuts rates, sees weaker economy in 2024 - REUTERS
By Promit Mukherjee and David Ljunggren
OTTAWA, July 24 (Reuters) - The Bank of Canada on Wednesday trimmed its key interest rate by 25 basis points for the second month in a row, bringing it to 4.5%, and said more reductions in borrowing costs were likely if inflation continued to cool in line with forecasts.
The central bank had kept its policy rate at a two-decade high of 5% for almost a year in a bid to combat high inflation.
In contrast, the European Central Bank kept rates unchanged last week after it cut them in June.
"We are increasingly confident that the ingredients to bring inflation back to target are in place," Bank of Canada Governor Tiff Macklem told reporters. The BoC reiterated that inflation should return sustainably to its 2% target in the second half of 2025.
The central bank trimmed its 2024 economic growth forecast to a lackluster 1.2% from the 1.5% it predicted in April, in part because households are setting aside more money to pay debts and have less to spend on discretionary items.
"The dovish language in the releases paints a picture of officials who are growing more worried about the likelihood of recession," Royce Mendes, head of macro strategy at Desjardins Group, wrote in a report.
The Canadian dollar weakened further after the rate cut announcement, with the loonie trading down 0.06% to 1.3794 against the U.S. dollar, or 72.5 U.S. cents.
Money markets see a 53% chance that the BoC will cut rates again in its next monetary policy decision on Sept. 4, and are factoring in just one more 25-basis-point cut this year, which would bring the policy rate down to 4.25% by the end of the year.
Macklem said the expected direction of the policy rate was lower, but the bank did not have a pre-determined path.
"It is reasonable to expect further cuts, but the timing is going to depend on incoming data. And importantly, what that data tells us about where inflation is heading," he said.
GROWTH CONCERNS
Downside risks to inflation are taking on increased weight in monetary policy deliberations, Macklem told reporters.
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Inflation is facing two opposing forces - a weak economy pulling it down and persistently high prices of shelter and services keeping it up.
"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," Macklem said.
The rise in consumer prices slackened to an annual 2.7% in June, with the central bank's closely tracked core measures of inflation also easing marginally.