By Promit Mukherjee and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada on Wednesday trimmed its key policy rate by 25 basis points for the second month in a row, bringing it down to 4.5%, and said more cuts were likely if inflation continued to cool in line with forecasts.
The bank had previously kept the rate at a two-decade high of 5% for almost a year in a bid to combat high inflation by suppressing economic growth.
“We are increasingly confident that the ingredients to bring inflation back to target are in place,” Governor Tiff Macklem told reporters. The bank reiterated that inflation should return sustainably to its 2% target in the second half of 2025.
The bank trimmed its 2024 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 Canadian dollar weakened further after the rate cut announcement, with the trading down 0.06% to 1.3794 against the U.S. dollar, or 72.5 U.S. cents.
Money markets are seeing a 52% chance of a cut in the BoC’s next monetary policy decision announcement on Sept. 4, and factoring in just one more 25 basis point cut this year, which would bring the policy rate down to 4.25%.
“We need growth to pick up so inflation does not fall too much,” said Macklem. The downside risks to inflation were taking on increased weight in monetary policy deliberations, he said.
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 that expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected,” said Macklem.
Consumer prices in June slackened to 2.7% with the bank’s closely tracked core measures of inflation also easing marginally. But this data followed a surprise jump in May.
In its quarterly Monetary Policy Report (MPR) released on Wednesday, the bank projected overall inflation would be 2.6% this year and 2.4% next year.
First quarter annualized growth was just 1.7%, way below the bank’s April forecast of 2.8%.
The bank said growth would increase in the second half, led by stronger exports and a recovery in household spending as borrowing costs ease.
“With the economy strengthening, excess supply will be absorbed next year and into 2026,” Macklem said.
The bank said it expected growth to be 2.1% in 2025, revised from 2.2% in April, and 2.6% in 2026.
