Market Wire: Loonie Retreats After Bank of Canada Cuts

The Bank of Canada resumed its easing cycle this morning as growth slows, labour markets erode, and inflation risks recede. Policymakers led by Governor Tiff Macklem lowered the policy rate by 25 basis points to 2.5 percent after staying on the sidelines in the three prior meetings. Seven consecutive cuts were previously delivered between June 2024 and March of this year, bringing the benchmark down from its peak at 5 percent.

In the official statement setting out the decision, policymakers noted that with “tariffs and trade uncertainty weighing heavily on economic activity,” weak exports and business investment are offsetting strength in consumption and housing activity in the Canadian economy, with “slow population growth and the weakness in the labour market” likely to “weigh on household spending” in the months ahead. On price pressures, the “upward momentum seen earlier this year has dissipated,” with a broader range of measures suggesting that “underlying inflation is running around 2.5 percent,” and “The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the US will mean less upward pressure on the prices of these goods going forward”.

“With a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks”.

In comments released ahead of the post-decision press conference, Governor Tiff Macklem sounded a dovish tone, saying “Three developments have shifted the balance of risks since our July decision: First, Canada’s labour market has softened further. Second, although there are still some mixed signals, on balance, recent data suggest the upward pressures on underlying inflation have diminished. Third, with the removal of most retaliatory tariffs by Canada, there is less upside risk to future inflation”.

Forward guidance was non-existent across both sets of communications—a sentence that previously read “there may be a need for a reduction in the policy interest rate” was removed from the statement—but Macklem did note that there was a “clear consensus” among policymakers in favour of the cut, suggesting that inflation fears have subsided on a fairly widespread basis. We think this clears the way for another move at the Bank’s October meeting as officials lower borrowing rates into more clearly-accommodative territory.

The Canadian dollar is ratcheting lower as we go to print, but the reaction has been fairly limited in scope, given that the rate cut itself had been widely anticipated in markets, where overnight index swaps were putting 91 percent odds on a move ahead of the decision. More volatility could come this afternoon.

The Federal Reserve is also seen cutting rates later today, with attention likely to focus on the updated Summary of Economic Projections, which will contain a new “dot plot” outlining how committee members see the policy trajectory evolving in the months to come, and on Chair Jerome Powell’s tone in the post-decision press conference. The Fed has been on hold since December amid a deceleration in economic growth and job creation, and most investors expect a dovish tone to emerge—meaning that there is some scope for a positive dollar reaction if officials sound more circumspect on the prospects for further easing.