The Bank of Canada said inflation pressures continue to ease, which is a reason to continue to cut interest rates. However, Macklem warned of the risks to future inflation, saying that as base effects fade, Canada's inflation may rise later this year, and the upward force of inflation may be stronger than expected.

On Wednesday, September 4, the Bank of Canada announced a 25 basis point interest rate cut, in line with market expectations. This is the third consecutive interest rate cut by the Bank of Canada. After this rate cut, the latest policy rate is 4.25%, compared with 4.5% in August.

In June this year, Canada became the first G7 country to cut interest rates, starting an easing cycle. The Bank of Canada cut interest rates by 25 basis points in June, from 5% to 4.75%, in line with market expectations. Since then, the European Central Bank has also chosen to cut interest rates. The Federal Reserve is expected to join the interest rate cut in September.

 

The Bank of Canada cited continued easing of inflationary pressures as a reason for further rate cuts. As overall inflationary pressures continued to ease, the Governing Council decided to reduce the policy rate by a further 25 basis points. Excess supply in the economy continued to exert downward pressure on inflation, while inflation was supported by price increases for housing and some other services. The Governing Council is carefully assessing these opposing forces on inflation. High housing price inflation remains the largest contributor to overall inflation, but has begun to moderate.

The Bank of Canada said preliminary indicators showed that economic activity in Canada weakened in June and July. Canada's labor market continued to slow, but wage growth remained high relative to productivity.

The Bank of Canada also noted that the Canadian dollar appreciated slightly, mainly reflecting a lower U.S. dollar and oil prices below the assumptions in its July Monetary Policy Report.

Bank of Canada Governor Tiff Macklem reiterated that further rate cuts are justified and policymakers will continue to assess the contradiction between economic weakness, which puts downward pressure on inflation, and the high costs of housing and certain services, which keep inflation high.

Macklem said that as inflation gets closer to the target, we need to be increasingly vigilant about the risks of the economy being too weak and inflation falling too much.

Still, Macklem warned of possible risks to future inflation, saying Canada's inflation could rise later this year as base effects fade, and the upward forces on inflation could be stronger than expected.

However, the most likely scenario is that the Bank of Canada will further cut interest rates next, Macklem said:

If inflation continues to decline broadly in line with our July forecast, we would be justified in lowering the policy rate further. We will continue to assess inflationary dynamics and make monetary policy decisions meeting by meeting. As inflation moves closer to our target, we hope to see growth pick up to absorb slack in the economy, allowing inflation to return sustainably to our 2% target.

USD/CAD fell to session lows following the Bank of Canada's rate cut decision:

 

Financial blog Zerohedge commented that with rising prices and falling currencies, Hungary may have ended its interest rate cuts, becoming the first central bank to end its easing policy ahead of schedule in this cycle. Other central banks still have a way to go before reaching this position. By then, the Bank of Canada will of course be forced to abandon its easing policy.

In July this year, the market generally believed that the Bank of Canada's stance had undergone a major change, and the central bank's attitude towards inflation had undergone a significant change. The balance of risks is also changing. Officials appear more convinced that price pressures are under control and are increasingly focused on a soft landing for the economy. This September meeting is a continuation of the July position.