The Bank of Canada reduced its target for the overnight rate to 4.25 percent, with the Bank Rate at 4.25 percent and the deposit rate at 4.25 percent, as it returns to balance sheet normalization.
The 25 basis point cut is the third consecutive time the central bank has reduced rates and was widely expected by economists. More cuts are expected this year, with financial markets betting that there is a 93 percent chance of another 25 basis point cut in October, while a %RateCut in December is fully priced in.
The central bank continues to weigh the impact of inflation versus slowing growth. Per Bank of Canada Governor Tiff Macklem, “… with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.” Weaker-than-expected growth might push the central bank to a larger 50 basis point cut in the coming months.
The overnight rate is also referred to as the policy interest rate—the starting point for setting many of the economy’s interest rates. Financial institutions use the deposit rate to deposit funds for one night or borrow money from us at the bank rate for one night.