The Bank of Canada on Wednesday cut its interest rate by 25 basis points for a second time in a row, citing a pullback in household spending on both consumer goods and housing as a reason to bring the rate down to 4.5 per cent even as price pressures in shelter and services continue to keep inflation elevated.

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“Economic growth in Canada has picked up, but remains weak relative to population growth,” Bank of Canada governor Tiff Macklem said during prepared remarks in Ottawa. “Household spending has been soft.”

The rate cut was in line with what markets and economists were expecting given the economic picture, and Macklem signalled that more cuts could be coming.

“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy rate,” he said. “The timing will depend on how we see these opposing forces play out.”

Randall Bartlett, senior director of economics at the Fédération des caisses Desjardins du Québec, said the central bank has struck a dovish tone.

“While governing council didn’t provide any explicit guidance about what comes next, there’s a strong sense that policymakers feel an urgency to continue the rate-cutting cycle in September,” he said in a note to clients. “The dovish language in the releases paints a picture of officials who are growing more worried about the likelihood of recession.”

The decrease in discretionary spending is mainly being driven by households having to allocate a large amount of their income to servicing their debts and a slowdown in demand for motor vehicles and travel abroad, according to the central bank’s Monetary Policy Report.

David Rosenberg, founder and president of Rosenberg Research & Associates Inc., said the central bank is behind on rate cuts and has a long way to go to bring balance back to the economy.

“The Bank of Canada is hardly done. This is the early stage of what will prove to be more than just a partial unwind of the most severe tightening cycle since the John Crow era of the late 1980s,” he said in a note to clients. “When you model out where the overnight rate should be in such a period of economic slack, it should be closer to two per cent than 4.5 per cent.”

Consumption growth is expected to rebound slightly to 2.25 per cent by the end of 2025, but the outlook is impacted by a number of factors. Households with mortgages are still facing higher debt charges, though these will decrease as interest rates fall. They are also getting higher income gains from elevated interest rates on investments. The combination of these factors makes it difficult for the Bank of Canada to predict when there might be a rebound in consumer spending.

The central bank expects gross domestic product (GDP) to grow by 1.5 per cent in the second half of this year, but the Canadian population is expected to grow by three per cent, which puts per-capita GDP in negative territory. The central bank is forecasting GDP growth of 2.1 per cent next year and 2.4 per cent in 2026.

The unemployment rate rose to 6.4 per cent in June and the number of job seekers is outpacing the supply of employment. The headline inflation rate for June was 2.7 per cent and core inflation, the preferred measure the Bank of Canada likes to look at when making its policy decisions, has remained below three per cent for months, but that’s still above the bank’s target of two per cent.

The central bank expects headline inflation to slow below core inflation by the end of this year, but it may pick up at the beginning of 2025. The Monetary Policy Report indicates the impact of lower gasoline prices should start to fade away at the beginning of next year, with inflation returning to target by the end of that year.

The Bank of Canada has turned more of its attention towards the downside risks to the economy as inflation gets closer to its target. The central bank is worried that household spending will continue to weaken and that the overall global economy will remain on the soft side. Geopolitical and trade tensions could also push inflation up and the cost of services could remain elevated.

The next policy rate announcement is scheduled for Sept. 4, 2024.

• Email: jgowling@postmedia.com

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