Ottawa — Following the announcement of a third straight interest rate cut on Wednesday, governor Tiff Macklem stated that the Bank of Canada may modify the rate of reductions if necessary.
Forecasters had anticipated the quarter-percentage-point decline given the economy's continued weakness and decreasing inflation.
Governor Tiff Macklem stated in his introductory remarks that the central bank's decision was driven once more by the need for growth to resume and the ongoing progress made on reducing inflation.
Although there were no surprises in the governor's announcement on Wednesday, he did indicate that he would be open to modifying the rate of cuts if necessary.
"Yes, it might be appropriate to slow the pace of declines if those upward forces in inflation proved to be stronger than we expected, or if there's significantly less slack in the economy than we assess," Macklem stated.
However, if the inflation rate was much lower than anticipated and the economy was substantially worse than anticipated, then it could be prudent to take a larger step—something larger than 25 basis points.
In the second quarter, the Canadian economy expanded more quickly than anticipated; nevertheless, preliminary statistics indicated that June and July saw weaker growth.
This, according to Macklem, indicates that growth may be less robust than the Bank of Canada had predicted.
Financial markets had placed minor bets for a half-percentage-point decrease, but the central bank chose to go cautiously, according to CIBC chief economist Avery Shenfeld.
"While some may argue that bold people win, the Bank of Canada chose a more measured approach by cutting rates by another quarter point, which means that rates are still much higher than what will be necessary to stimulate the economy and get it back on track now that inflation is less of a concern," Shenfeld wrote.
Macklem restated that it is "reasonable" to anticipate further rate reductions if inflation keeps declining as predicted.
Canada's annual inflation rate was 2.5% in July after falling below 3% for several months.
Macklem has emphasized the need of weighing the potential upside and negative risks now that the central bank's target inflation rate is within reach.
According to Macklem, "there is a risk that the upward forces on inflation could be stronger than expected."
"As inflation approaches the target, we must continue to take precautions against the possibility that the economy will be too fragile and that inflation will decline too sharply."
A quarter-point rate drop, according to TD Chief Economist Beata Caranci, was the right move considering the economy's continuing conflicting signals.
However, she claims that the Bank of Canada is more concerned with the downside risks, which means that the likelihood of inflation falling more than anticipated rather than the other way around is higher.
"Some cracks are beginning to form in the job market as well as in the consumer side," stated Caranci.
"And inflation is roughly on target at 2.5 percent; we are arguing about our 50 basis points."
The Bank of Canada will make its next announcement about interest rates on October 23.