MNI BOC WATCH: Third Straight Cut And Signals More Are Coming

The Bank of Canada lowered interest rates for a third consecutive meeting on Wednesday and again signaled further moves can be justified given a broad inflation slowdown that officials see as creating a growing risk that prices fade too much.

"We care as much about inflation being below the target as we do above," Governor Tiff Macklem said in the text of an opening press conference statement from Ottawa. "With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much."

The decision noted other weakness including early signs the economy will lag its projected rebound in the second half of the year, growing stalled job growth and existing slack in the economy. Governing Council members continued to warn of upside pressures from shelter and some other services, and the prospect that despite the broad easing trend inflation could show some bumpiness before settling back on target. (See RPT: MNI BOC WATCH: 3rd Cut Seen; Macklem Seen Signaling More)

"If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time," Macklem said.

Cutting by 25bp to 4.25% and the dovish notes are in line with the forecasts of economists, who also say the Bank is on a path to keep cutting at its two remaining decisions this year and perhaps with just a pause or two on the way back to a neutral rate around 2.75%. Canada's per capita GDP has fallen for much of the last year and the jobless rate has climbed by a percentage point, problems investors say have been masked by record immigration and requires much less restrictive policy.

Rates remain tight relative to inflation that slowed to a three-year low of 2.5% and core prices have also moved back within the Bank's 1% to 3% target band this year. The Bank's first rate cuts in June and July were somewhat uncomfortable in moving ahead of G7 peers but Federal Reserve Chair Jerome Powell has signaled he's prepared to cut for the first time later this month and other central banks are removing tight policy that subdued the post-pandemic inflation burst.

The Bank in July said only that inflation will return to target sometime in 2025, a view it didn't update today. Lingering upside concerns around wages and housing prices have many investors looking for whether Macklem keeps signaling 25bp cuts or whether a jumbo reduction is possible. The Bank is already in some extraordinary cutting territory-- it's the first time since 2009 the Bank has cut rates at three scheduled meetings in a row.

Judging the economy's tightness is complicated by the biggest influx of immigrants in decades boosting labor supply and creating more demand. The federal government recently moved to cap some entrants citing pressure on housing costs and a slowing job market.