BoC Governor’s comments on lowering interest rates in Canada and the recent US Fed rate decision
Further rate cuts are warranted given the Bank of Canada’s continued progress in bringing inflation down to 2%, Governor Tiff McClum said Tuesday (the central bank wants to keep inflation at the midpoint of its target range of 1% to 3%). The rate cut comments were McClellum’s first since the release of August consumer price inflation (CPI) data, which fell to 2%, the lowest since February 2021.
McClum’s comments set a different tone from his earlier remarks, in which he said more rate cuts could be possible if they were successful in containing inflation.
Also on Tuesday, Mr. McClum made it clear that the bank has already achieved at least some of its key goals.
“Given the continued progress in inflation, further cuts in the policy rate are expected,” he said at the Toronto meeting. “The timing and pace will be determined after we assess the new incoming data and its impact on inflation.”
A sustained decline in consumer prices since the beginning of the year prompted the central bank to start cutting rates, and starting in June, it cut its benchmark lending rate by a total of 75 basis points to 4.25%.
The central bank’s next monetary policy announcement is scheduled for October 23, with interest rate futures markets pricing in more than a 58% chance of a rate cut as large as 50 basis points. An additional 25 basis point cut is also expected at the December meeting later in the year.
“I’m pleased to see inflation back to our 2 percent target. It’s been a long road,” Mr. McClum said.
“Now we want to keep inflation between 1% and 3%. We want the economy to stabilize.”
McClellum hoped that growth would pick up and absorb the economy’s potential.
In August, a closely watched key pricing metric also fell to its lowest level in 40 months. “Core inflation is easing, but it’s still running just above 2%,” McClum said. He said he is concerned that recent indicators suggest a slowdown in growth, and the bank will be watching consumer spending and business hiring and investment closely. Economists believe that third-quarter growth is likely to be half of the central bank’s 2.8% forecast.
US Fed cuts interest rates for first time in four years
The US Federal Reserve (Fed) acted as expected on Wednesday, announcing its first interest rate cut in a long time. The decision will have a major impact on Americans’ finances, lowering the cost of borrowing while also suggesting that the era of high-yield savings products may be coming to an end.
The Fed’s policy committee voted to cut the federal funds rate by 50 basis points (0.5%), the result of a debate between a 25 or 50 basis point cut.
The cut was the first reduction in the federal funds rate since March 2020, bringing it down to 4.75%~5%from the 5.25%~5.5% range it had been in since July of last year. This is down from the highest level since 2001. The change is the result of a moderation in inflation after an initial spike.
How does the Fed’s rate cut affect the housing sector?
Mortgages are one of the clearest impacts of a rate cut on consumers, with mortgage rates closely tied to government bond yields, which in turn reflect the Fed’s monetary policy. Last week, mortgage rates on 30-year fixed-rate loans fell to a 19-month low of 6.2%, and brokers were preparing for a rate cut. This downtrend is likely to continue as the Fed prepares for further rate cuts.