On July 25th, the Bank of Canada announced a rate cut for the second consecutive meeting, lowering the interest rate by 25 basis points to 4.5%, once again taking the lead in rate cuts among G7 countries. The bank also indicated that further rate cuts are possible in the future if inflation continues to cool down.

Regarding the rate cut decision, the Bank of Canada stated that the economic growth rate for the first half of this year may rebound to around 1.5%. However, due to strong population growth, the final growth rate may exceed 3%. The growth rate of Canada's potential economic output remains faster than the growth rate of gross domestic product, indicating an increase in the situation of supply surplus.

In terms of inflation, the bank stated that widespread domestic inflationary pressures are easing. After rising in May, the CPI inflation rate slowed to 2.7% in June. The World Bank's preferred core inflation indicator has been below 3% for several months in a row, and the price increase of each component of the CPI is now close to the historical norm. The only regret is that housing price inflation, driven by rent and mortgage interest costs, remains high and continues to be the largest contributor to total inflation. In addition, the inflation rate of service industries closely affected by wages, such as catering and personal care, has also risen.

However, under the high pressure of interest rates, household spending in Canada, including consumption and housing, has been weak in the first half of the year. There are signs of slack in the labor market. The unemployment rate has risen to 6.4%, and the pace of employment growth continues to be lower than the pace of labor force growth, with job seekers needing more time to find work. Wage growth has shown some signs of slowing down but is still at a high level.

The Bank of Canada expects that from the second half of 2024 to 2025, the domestic economic growth rate will rise, reflecting that as borrowing costs decrease, household spending and business investment in Canada will gradually recover, and exports will gradually strengthen. It is expected that residential investment in Canada will grow strongly. In terms of population issues, with the government's new restrictions on the entry of non-permanent residents, population growth in 2025 will slow down.

It is expected that by 2026, the global economy will continue to expand at an annual rate of about 3%. Although the inflation rate in most developed economies is still higher than the central bank's target, it is expected that the inflation rate will gradually slow down. In the United States, the expected economic slowdown is being achieved, and consumption growth is slowing down. Inflation in the United States seems to have resumed a downward trend; the same is true for the Eurozone, where economic growth is recovering after the weakness of 2023. Overall, the global financial situation has eased, with bond yields falling, stock prices rising, and corporate bond issuance strong. The Canadian dollar is relatively stable, and oil prices are close to the level assumed in the April Monetary Policy Report (MPR).

After this interest rate decision, the Canadian money market estimates that the probability of the Bank of Canada cutting rates again in September is about 50%.

Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, said that the central bank's balance sheet has not yet reached the level it should be at, and the central bank can to some extent ignore the interest rate costs of mortgage loans; relying on interest rates to solve housing issues is "wrong." Analysts said that the "doveish" rhetoric of the officials indicates that the officials have turned their attention to ensuring that inflation does not significantly fall below the 2% target.

Regarding this rate cut action, Doug Porter, Chief Economist of Montreal Bank Capital Markets, said: "The Bank of Canada's rate cut itself is not too surprising. The market has largely anticipated this." "There are a few things that stand out to me... many people are talking about downside risks. Whether the committee is more focused on downside risks or they are actually trying to talk about stimulating economic growth, they are talking about signs of slack in the labor market, which to me is a signal that there will be more interest rate adjustments soon." "We are watching September. In the next period, we may need good inflation data to lock in another rate cut in September."

Andrew Kelvin, Head of Canadian and Global Interest Rate Strategy at TD Securities, also said: "The Bank of Canada's rate cut was widely expected. I would say that the initial impression is a bit more dovish than I expected. The Bank of Canada seems to have indeed intervened in some weaker aspects of the economy, but they will ultimately link further monetary policy easing with the evolution of the inflation outlook. So it is still a data-driven approach. We do indeed expect that there will be a further 50 basis points of rate cuts this year after this rate cut. So we continue to take this as our base case."

Stephen Brown, Deputy Chief Economist for North America at Capital Economics, said that the Bank of Canada's remarks indicate that if inflation continues to slow down, it will continue to cut rates. "Our forecast for inflation this quarter is the same as the central bank's, which leads us to judge that another rate cut in September is the most likely outcome."

Avery Shenfeld, Chief Economist and Managing Director of CIBC Capital Markets, analyzed that the Bank of Canada's statement has led him to adjust his forecast for September and the rest of 2024. Shenfeld previously expected that the interest rate would remain unchanged in September and then cut again in December, but now he expects a rate cut in September, "It is obviously a dovish central bank now, which is seeking to relax interest rates and promote economic growth again, so there is another 50 basis points of rate cuts this year, and we expect the interest rate to reach 2.75% by the end of 2025, which is completely consistent with this position."