On July 24th (Wednesday) at 21:45 Beijing time, the Bank of Canada lowered its benchmark interest rate for the second consecutive month, cutting it by 25 basis points to 4.50%. The central bank stated that the weight of downward inflation risk is increasing in its deliberations.
Analysts say that the Bank of Canada is shifting its focus to boosting the economy rather than suppressing inflation, which increases the possibility of further interest rate cuts in the coming months.
Investors believe that the possibility of the Bank of Canada further easing policy at its next policy meeting in September is about 60%. Investors expect a total of 44 basis points of interest rate cuts by the end of this year, which means that the policy rate is 6 basis points lower than previously expected. The Bank of Canada's next decision will be made on September 5th.
Accelerating the pace of interest rate cuts will ease the pressure on heavily indebted Canadian households. It may also increase pressure on the Canadian dollar. The Canadian dollar fell on Thursday, and the US dollar against the Canadian dollar rose to a three-month high of 1.3848, and maintained a high level of shock on Friday.
Philip Petursson, chief investment strategist at IG Wealth Management, said: "The Bank of Canada has shifted its focus from the victorious battle against inflation to the more necessary economic support, which indicates that its policy has reversed."
In recent quarters, Canada's GDP growth rate has been lower than the trend growth rate estimated by the Bank of Canada, which is 2.25%. The growth rate for the first quarter was 1.7%.
Slow GDP growth has led to economic oversupply and cooling inflation. The inflation rate in June was 2.7%. However, if the economy is too weak, the degree of inflation slowdown may exceed the central bank's expectations.
Although high interest rates have not caused the Canadian economy to fall into recession, economists say that economic growth is mainly driven by a significant increase in population.
McLemore said on Wednesday that the bank is not only concerned about overall economic growth, but also per capita GDP, which has declined for four consecutive quarters.
Jason Daw and Simon Deeley, strategists at RBC Dominion Securities Inc, said in a report: "The Bank of Canada's stance is as dovish as possible."
These two strategists said: "There is only one inflation report before the next meeting, and the threshold for the central bank not to cut interest rates is very high."
Charu Chanana, head of forex strategy at Scotia Bank, believes that the interest rate differential between the Bank of Canada and the Federal Reserve is widening, which may make the Canadian dollar more vulnerable. However, upcoming developments in US politics and market expectations on Fed actions may also affect the performance of the Canadian dollar.
USD/CAD Daily Chart
At 7:06 Beijing time on July 26th, the US dollar against the Canadian dollar reported 1.3822/24.