The Bank of Canada (BoC) has trimmed its key interest rate by 25 basis points for the second consecutive month, bringing it to 4.5%. This decision signals a shift towards a more dovish stance, acknowledging the slowing economy and cooling inflation. The central bank is increasingly confident that inflation will return to its 2% target by the second half of 2025. However, the BoC has also lowered its 2024 economic growth forecast to 1.2% from 1.5% due to households prioritizing debt repayment and reduced discretionary spending.
Concerns about a potential recession are growing. While the BoC expects stronger growth in the second half of 2024, fueled by export growth and a rebound in household spending, the central bank is carefully monitoring the economic outlook. Further rate cuts are likely if inflation continues to cool as predicted, but the timing will depend on upcoming economic data.
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The Canadian dollar weakened further after the rate cut announcement. The BoC is balancing the risk of inflation staying high against the risk of a weaker economy and inflation. Despite the economic concerns, the central bank remains optimistic that the economy will strengthen in the coming years, leading to a return to 2% inflation.