Quote:
Originally Posted by Cowboy89
Is the Bank of Canada cutting rates because inflation's under control or is it cutting rates because the underlying economy is more vulnerable than others? The inflation rate mandate is 2%, it's currently as of last print in June was 2.7%. FX rate is 1.38 CAD per USD and moving higher. This isn't a victory lap moment.
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Well they look a lot deeper than the headline year-over-year inflation number and consider the lag effect of rate changes. And right now, there are only 2 reasons it's currently above the 2% target:
1) Last July and August were abnormally high; over the last 10 months, inflation is 1.7% on a seasonally adjusted basis. If July and August 2024 come in relatively normal, we'll be at or near 2% by August's reading and with a clear downward trajectory.
2) Mortgage interest inflation is adding over 1 percentage point to the headline number. That's a policy effect, not a supply/demand one. You can't necessarily exclude it from the calculation, but when it's the only thing keeping inflation above the 1% low end of the target range (as it has been over the last 10 months), then it's pretty clear that conditions are very restrictive.
So yeah, regardless of what the economy is doing, I think they'd be cutting, and getting out of restrictive territory is generally a good thing as it supports economic growth. There's a reason the bond markets are pricing in 3 cuts for the US this year, even though economic conditions there still look pretty good.
As for the exchange rate, with the exception of a period during COVID where the USD dropped, the Canadian dollar has basically been $0.74 +/- 2 cents for the last 7 years or so. We're on the low end of that range to be sure, but it really hasn't changed a whole lot if you zoom out.