Bank of Canada Cuts Rates But Warns of Excess Supply, Policy Still Restrictive

Canada’s central bank kicked off its easing cycle, but it’s far from providing ease. The Bank of Canada (BoC) announced it would be cutting the overnight rate earlier today. It attributes the need to cut to the economy growing slower than they had forecast. They further warn the economy is in a phase of excess supply, though policy will remain restrictive for the near-term.

Bank of Canada Cuts The Overnight Rate As Economy Underperforms

The BoC rolled back its most recent rate move in less than a year. A 0.25-point cut to the overnight rate was announced this morning, returning the key policy rate back to the 4.75% level it was at less than a year ago. A widely expected decision, with the market pricing in 75% chance it would happen. 

The central bank attributed the cut to the economy not just underperforming global peers, but also their own forecast for real GDP growth. They further noted concerns about employment, which is growing much more slowly than expected. 

Canadian Economy Operating In “Excess Supply” 

With inflation still above its target rate, they were quick to reiterate the economy is still performing well in some areas. It notes consumer demand and real estate remain resilient. “Overall, recent data suggest the economy is still operating in excess supply,” said the BoC. 

Excess supply gives the central bank some room to cut, but not a whole lot with inflation still elevated. That might be why they’re so comfortable with this cut, since they estimate the impact of a rate decision takes 18 to 24 months to fully be realized in the market. 

Today’s rate cut occurred less than a year after the most recent rate hike. That means it’s not providing ease so much as it’s curbing the full impact of the most recent hike.

Canada Kicked Off The Easing Cycle, But Policy Remains Restrictive

What might be more important than the actual impact on credit is the sentiment indicator. “The rate cut today from the Bank of Canada marks the first step of an easing cycle where interest rates are lowered back towards “normal” levels, and spells good news for Canadian households that have been contending with elevated borrowing costs,” wrote RBC to investors.

However, they warn the overnight rate is still elevated to address the issue of excess supply. “That still, however, leaves monetary policy firmly in ‘restrictive’ territory – the change in interest rates today is the equivalent of the central bank easing off the brakes rather than stepping on the gas,” they add. 

For those hoping the cut will revive housing demand, it has quite the uphill battle. Toronto, the country’s largest real estate market, just had the weakest May on record when it came to demand, as sellers greatly outpaced buyers. With record excess supply, a few more rate cuts might be needed before any meaningful revival.