Recently, the Bank of Canada has taken a series of interest rate cuts to address the pressure of economic slowdown. Particularly on October 23, 2024, the Bank of Canada announced a reduction of the key interest rate by 50 basis points to 3.75%, marking the fourth consecutive rate cut. This move has sparked widespread market attention regarding the state of the Canadian economy and the direction of future policy.
1. Review of Recent Interest Rate Changes
According to Wind data, we can observe the following changes in the Bank of Canada's interest rates:
June 5, 2024: Reduced from 5.25% to 5.00%
July 24, 2024: Reduced from 5.00% to 4.75%
September 4, 2024: Reduced from 4.75% to 4.50%
October 23, 2024: Reduced from 4.50% to 3.75%
From these data, it is evident that the Bank of Canada has implemented four consecutive interest rate cuts in just a few months, accumulating a total reduction of 150 basis points. Especially the 50 basis point cut on October 23, which is quite substantial, can be considered as a "violent rate cut."2. Background and Reasons for Interest Rate Cut
1) Economic slowdown: The Canadian economy faced multiple challenges in 2024, including global trade tensions and weak domestic consumption and investment. Particularly, although the employment data for September exceeded expectations, the overall economic performance remained pessimistic. Data released by Statistics Canada showed that the number of employed people increased by 46,700 in September, but the unemployment rate was still as high as 6.5%.
2) Easing inflationary pressure: In the interest rate cut statement on June 5, the Bank of Canada mentioned that core inflation was easing, and monetary policy no longer needed to be as restrictive. This indicates that the central bank believes the current high interest rates have a greater negative impact on the economy than their role in controlling inflation.
3) Global interest rate cut trend: Worldwide, many central banks have taken measures to cut interest rates to cope with economic slowdowns. The Bank of Canada's interest rate cut is also in line with this global trend, aiming to stimulate economic growth by reducing financing costs.
3. Impact of Interest Rate Cut and Market Reaction
1) Financial market: After the Bank of Canada cut interest rates, the yield on two-year government bonds fell by 2.1 basis points to 3.013%. This indicates that the market's expectations for the rate cut have been partially reflected in asset prices, but the actual rate cut exceeded expectations, leading to a further decline in bond yields.
2) Exchange rate: The US dollar against the Canadian dollar fell nearly 20 points in the short term after the Bank of Canada cut interest rates, reporting 1.3541. This indicates that market concerns about the Canadian economic outlook have eased, and the Canadian dollar exchange rate has been supported.
3) Economic expectations: Although the interest rate cut helps to reduce financing costs, the market remains cautious about Canada's long-term economic prospects. Some analysts believe that the Bank of Canada may further cut interest rates before the end of 2024 to ensure economic recovery.4. Future Policy Outlook
1) Possibility of Further Rate Cuts: Former Deputy Governor of the Bank of Canada, Bodri, stated that there are "compelling reasons" to adjust interest rates "back to near-neutral levels as soon as possible." It is anticipated that following the 50 basis point rate cut on October 23rd, the Bank of Canada will continue to lower rates further before the end of 2024. The Royal Bank of Canada also forecasts that by the middle of next year, the Bank of Canada will reduce the interest rate to 2%.
2) Uncertainty of Economic Recovery: Although rate cuts can help stimulate the economy, the recovery of the Canadian economy still faces many uncertainties. Particularly, the global trade environment and the recovery of domestic consumer confidence will be key factors in determining the future economic trend.
The recent "aggressive rate cut" measures by the Bank of Canada reflect its concerns about economic slowdown and confirmation of the alleviation of inflationary pressures. By significantly lowering interest rates, the Bank of Canada aims to reduce financing costs and stimulate economic growth.
However, uncertainties in economic recovery still exist, and future policy directions will depend on the performance of economic data and changes in the global environment. The market has high expectations for further rate cuts by the Bank of Canada, but the ultimate effectiveness remains to be seen.
- 8 August'24
Leave Your Comment