The Bank of Canada (BoC) reduced its target for the overnight rate by 25 basis points to 4.25% today, marking the second consecutive rate cut in its monetary policy tightening cycle.  This outcome was widely expected as discussed in our Event Guide.

In its statement, the BoC noted that:

• The global economy expanded by about 2.50% in the second quarter, in line with July projections
• Canada’s economy grew by 2.1% in Q2, slightly stronger than forecast
• Inflation slowed further to 2.5% in July, with core inflation measures averaging around 2.5%
• High shelter price inflation remains the biggest contributor to total inflation but is starting to slow

Link to the September BoC Statement

In his press conference, BoC Governor Tiff Macklem emphasized several key points:

• The risk of inflation becoming too weak is now factoring into rate decisions
• Rate cuts will help reduce pressure on households, who are “feeling the squeeze from higher rates”
• The economy needs growth to climb above 2%
• There is “enough slack in the economy” to get CPI to the 2% target
• The BoC is “prepared” to take a “bolder step” on rate cuts if necessary

Macklem added, “With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up.”

TL;DR: The Bank of Canada cut rates by 25bps and signaled a willingness for more aggressive easing if needed, with a focus on balancing inflation risks and economic growth.

Link to the September BoC Press Conference

Market Reactions

Overlay of CAD vs. Major Currencies Chart by TradingView

Despite the cut, the initial reaction to the BoC statement release at 09:45 am ET saw a brief strengthening of the Canadian dollar across the board, signaling a “buy-the-rumor, sell-the-news” reaction, somewhat expected given the sell pressure on the Loonie that started in the London session and lead up to the event.

However, this was quickly reversed against most of the majors before the start of the next hour. This likely reflects a mix of the rate cut and  the broad risk aversion environment seen in the markets on the session.

The start of the BoC press conference at 10:30 triggered another very brief round of CAD strengthening, but as the press conference progressed, the Canadian dollar’s performance diverged among currency pairs.

It maintained and extended gains against some currencies (notably AUD, GBP, and NZD) while losing ground against others (particularly JPY and CHF), signaling that the weight of broad market sentiment took over as the main driver for Loonie behavior.