BoC Expected to Lower Interest Rates

The Bank of Canada (BoC) is anticipated to lower its policy rate for the third consecutive time on September 4, likely cutting it by 25 basis points to 4.25%. This move reflects the central bank’s response to declining inflation and a weakening labour market.

Since early 2024, the Canadian Dollar (CAD) has weakened against the US Dollar (USD), reaching a peak near 1.3950 in August. However, the CAD has since appreciated, pulling the USD/CAD pair lower by about 5 cents.

In July, Canada’s annual inflation rate, as measured by the Consumer Price Index (CPI), dropped to 2.5%, with the BoC’s core CPI falling to 1.7%, below the bank’s 2.0% target. The expected rate cut is tied to these lower consumer prices and a forecasted softening in the labour market.

Despite the anticipated rate reduction, the BoC is expected to maintain a cautious stance, with further rate decisions dependent on economic data. Governor Tiff Macklem emphasised the need for balanced economic growth and job creation to return inflation to the 2% target without overburdening the economy.

The BoC’s policy decision will be announced at 13:45 GMT on September 4, followed by a press conference at 14:30 GMT. The impact on the CAD will likely hinge on the bank’s messaging, with hints of further rate cuts potentially weakening the currency.