The Bank of Canada cut interest rates by a quarter percentage point for a third consecutive meeting, and reiterated that it's “reasonable” to expect more easing to come if inflation keeps decelerating.

Policymakers led by governor Tiff Macklem lowered the benchmark overnight rate to 4.25% on Wednesday, as widely expected by markets and economists in a Bloomberg survey.

Officials' communications were little changed since their July meeting, and highlight the central bank's increased focus on balancing the upside and downside risks to inflation, even as they see “little evidence” of broad-based price pressures.

“We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time,” Macklem said in prepared remarks.

“We want to see economic growth pick up to absorb the slack in the economy,” Macklem said, adding that the overall weakness continues to “pull inflation down”.

But policymakers also reiterated they're concerned about undershooting their 2% inflation target. “We need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” the governor said.

The communications reinforce officials' shift in thinking about inflation - policymakers are increasingly concerned about downside risks to the economy, and have started gradually loosening monetary policy to engineer a soft landing.

The bank restated there remains “a risk that upward forces on inflation could be stronger than expected” and officials say price pressures for shelter and other services are still “holding inflation up.” Policymakers also noted that so-called base effects “may bump up” inflation later in the year.

“We care as much about inflation being below the target as we do above,” Macklem said.

While the central bank acknowledged that the economy grew faster than expected in the second quarter, officials noted that was largely due to government spending and business investment. Officials said there was “some downside risk” to the pickup in growth the central bank had forecast for the second half of 2024.

Economists surveyed by Bloomberg in August see the Bank of Canada cutting by a quarter percentage point at each of the next four meetings, with the policy rate falling to 3% by the middle of 2025. That would put it within the bank’s so-called neutral range, the estimated level as which interest rates neither slow nor stimulate the economy.

Wage growth in the absence of productivity gains remains an issue for the bank, but they expect compensation pressures to ease as the labour market weakens. “Business layoffs remain moderate, but hiring has been weak,” the bank said.

In June, Macklem became the first Group of Seven central banker to launch into monetary easing, and the bank cut interest rates again in July.

Since July, it’s also become clearer that the US Federal Reserve will soon lower rates. That should help to thwart worries about Macklem moving too quickly ahead of Canada’s largest trading partner, a scenario that risked pressure on the loonie.

Canadian consumers are feeling the pinch of higher borrowing costs, and per-capita household consumption is falling at a pace usually seen in recessions. Overall growth has been propped up by record immigration, and there’s a wave of mortgages that are set to renew at much higher levels.

But economists surveyed by Bloomberg aren’t expecting mass layoffs. While the jobless rate has risen to 6.4%, from 5% at the beginning of last year, it’s not forecast to rise much higher than a 6.7% peak at the end of 2024, according to the median estimate.

  - Bloomberg