Bank of Canada reaction: Are more rate cuts on the way?

The Bank of Canada cut interest rates for the first time in months on Wednesday – but its “incredibly careful” language gave little clue on the prospect of rates moving even lower in the months ahead, according to BMO’s chief economist.

Doug Porter (pictured) told Canadian Mortgage Professional the central bank’s statement, and governor Tiff Macklem’s remarks in the subsequent press conference, gave no indication that further rate cuts are a sure thing.

“I found the language to be incredibly careful. There were no promises on that front,” he said. “They kept [mentioning] their short-term focus.

“And to me, that means they’re basically going to react to how the data and events unfold in the next six weeks. And the next meeting is only six weeks away, so that’s a pretty tight timeframe.”

The Bank’s decision marked the first time it’s reduced rates since March and means its benchmark rate now sits at 2.5% – a full 250 basis points lower than where it lay 18 months ago.

Porter and BMO still believe the Bank will leave rates unchanged in October before cutting in December, holding in January, and lowering again in March.

But plenty could still change between now and then – meaning the central bank kept its cards close to the chest in Wednesday’s statement. “The Bank certainly did nothing to quash the possibility of further cuts,” he said. “It’s just they didn’t exactly encourage them either.”

Fed decision likely to prove welcome relief for BoC

The main reason for that continuing caution is that the Bank still doesn’t appear comfortable with the inflation outlook, with the consumer price index (CPI) ticking up to 1.9% last month and core measures remaining sticky.

But Wednesday’s decision by the Federal Reserve to lower its own funds rate also possibly gave the Bank some breathing space on cuts, even if the Canadian central bank has already shown itself comfortable in diverging from the Fed.

“The Bank has shown in recent years that it’s not going to doggedly follow the Fed step by step. They actually got well ahead of the Fed on the way down here,” Porter said. “So they’re not necessarily going to be dictated by what the Fed does. But I would say there are two reasons why the Fed easing makes their job easier.

“The first is, if the Fed is actually responding to what it believes is a weaker growth backdrop and a milder inflation backdrop, then the Bank of Canada would be responding to more or less the same signals. But second of all, with the Fed easing, it does take some more of the potential downward pressure off the Canadian dollar than if the Bank was going it alone.”

Is the tariff outlook brightening?

Macklem said on Wednesday the Bank was paying close attention to developments in the trade war with the US, which saw a de-escalation of sorts in recent weeks as the Canadian government scrapped some of its counter-tariffs on US imports.

Porter said there’s reason for cautious optimism on the trade outlook. “More broadly, we’ve had a little less noise on that front globally with the deals that the [US] administration has hammered out with some countries. That has given us some stability,” he said.

“It might not be an ideal equilibrium for anyone, but we have seen some stability. And while there’s quite obviously a lot of questions over where the USMCA [US-Mexico-Canada Agreement] is headed, it just seems like a little less of an immediate threat to the Canadian economy.”

That's not to say Canada is out of the woods but even though there's been little progress in trade talks with the Trump administration, the economic cliff no longer appears as steep. "Even from a few months ago nothing's really changed for Canada, but it's gotten no worse," Porter said. "And there are some indications that we might be able to reach some kind of accord with the US. It does seem like the risks have waned somewhat." 

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