Bank of Canada:
Last week the Bank of Canada lowered its key interest rate again, bringing it to 4.50%. This is the second time in a row they’ve done this, cutting it by 0.25% each time. The main reason for this change is that the Bank is now more focused on boosting economic growth rather than just controlling inflation. They’ve made good progress on managing inflation, so now they’re trying to make sure the economy doesn’t slow down too much; preserving a soft landing.
Governor Macklem mentioned that they’ll decide on rates one meeting at a time, but the overall message was more dovish and hopeful. The reason behind this rate cut is that the economy isn’t growing as fast as expected, which should help keep inflation lower in the coming months.
One big concern they have is that people are spending less, and this might get worse as more people have to renew their mortgages at higher rates. The job market is also showing signs of slowing down, with more people taking longer to find work and the unemployment rate rising to 6.4%.
The Bank seems confident they’ve made enough progress on inflation to consider more rate cuts in the future. The Bank of Canada might cut rates faster than the U.S. Federal Reserve because the Canadian economy is more sensitive to interest rate changes. While the market expects two more cuts this year, there’s a chance we might see a third if the economy continues to slow down.
The Federal Reserve:
The U.S. Federal Reserve decided not to change interest rates on Wednesday, which was expected. However, Fed Chair Jerome Powell surprised many by suggesting that a rate cut might happen in September. The official statement from the Fed sounded hawkish, but Powell’s press conference was more dovish, hinting at possible rate cuts by the end of the year.
After Powell’s comments, U.S. bond yields dropped to new lows, and the stock market reacted positively. This was a relief after a week of significant market ups and downs, where investors moved away from big tech stocks to smaller, more value-oriented stocks.
The Fed started raising interest rates two years ago to control inflation, which has now dropped to 3% from a peak of 9.1% in June 2022. They have kept rates high to bring inflation closer to their 2% target.
While inflation has been the main focus, Powell said they are now also paying attention to employment. The US unemployment rate has risen to 4.3%, and if it continues to rise, the Fed might lower rates to make borrowing cheaper for businesses, encouraging them to hire more people.