MNI BOC WATCH: 25BP Cut On Weak Job Market, Guidance Dropped

The Bank of Canada lowered its policy rate a quarter point to 2.5% after three meetings on hold citing weak hiring and less inflation pressure, dropping guidance about potential easing while keeping a phrase about being less forward looking during the trade war.

"Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks," according to a statement Wednesday from officials led by Governor Tiff Macklem. "We will support economic growth while ensuring inflation remains well controlled." The decision was expected by 16 of 20 economists surveyed by MNI and some predict another cut in October or December.

Core inflation has remained around 3% but "upward momentum seen earlier this year has dissipated" and other measures suggest the trend is about 2.5%, officials said in a decision reflecting a "clear consensus" after halting a string of seven cuts in March. Unpredictable U.S. policy will continue to drag on the economy as focus turns to next year's negotiations for renewing a North American trade pact, the Bank said. 

"The Bank will continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information," Macklem said in remarks for a press conference at 1030am EST.

ECONOMIC FALLOUT BROADENS

Hiring has slowed outside industries hurt the most by U.S. tariffs such as makers of autos, steel and aluminum, the Bank said. At the last decision officials said hiring in other industries was holding up.

"Businesses are also concerned that demand in Canada will weaken as the economic fallout broadens," Macklem said. "New US threats to use tariffs as an instrument of geopolitical pressure are also contributing to global uncertainty."

Domestic spending is also set to fade on slowing population growth the Bank said, following the government's move to curb immigration after years of record increases. 

Canada dropped retaliatory tariffs on some U.S. imports at the start of this month and the Bank said that would ease inflation pressure, though there was little evidence those levies drove inflation that was coming from food and shelter before Donald Trump's re-election.

KEEPING PRICES COOL

Weakness from the trade war triggered the highest jobless rate in almost a decade outside the pandemic and a record year-to-date trade deficit that shrank the economy in the second quarter. Before the trade dispute Canada sent three-quarters of exports to the U.S. accounting for one in ten jobs.

The Bank in April gave up on a precise economic forecast to give scenarios based on the intensity of the trade war. The July baseline scenario had growth of 1% in the third quarter while investors predict just half that pace.

Canada's central bank unlike the Federal Reserve has a single mandate to keep inflation in the middle of a 1% to 3% band. Rate cuts risk of another round of public anger if the cost of living remains in the spotlight though investors see little chance of returning to anything like 8% inflation seen following pandemic lock-downs.

"The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval," the Bank's statement said.