Bank of Canada cuts rate by 25bps

The Bank of Canada cut rates to 4.5% as inflation slows, while US PMI shows strong services but weak manufacturing

By Ahmed Azzam | @3zzamous | 24 July 2024

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  • Bank of Canada cuts key rate to 4.5%

  • US PMI Services hits 28-month high

  • US PMI Manufacturing contracts to 7-month low

The Bank of Canada (BoC) reduced its key interest rate by 25 basis points to 4.5% during its July 2024 meeting, aligning with market expectations. This follows a similar cut in June, marking the continuation of a loosening cycle after maintaining the terminal rate at 5% for ten months. The BoC’s Governing Council highlighted that excess supply in the Canadian economy has contributed to a recent deceleration in inflation, justifying the shift towards a more accommodative monetary policy. The Canadian labor market has also exhibited signs of moderation, reinforcing this stance.

Additionally, the central bank pointed out that lower interest rates could help mitigate mortgage and shelter costs, which have been the primary drivers of inflation. The Governing Council anticipates a decrease in CPI inflation in the latter half of the year due to base effects related to gasoline prices, with inflation expected to stabilize at 2% by 2025.

US PMI composite rises to 27-month high on robust services sector

In the United States, the PMI Manufacturing index fell to 49.5 in July, a seven-month low, down from 51.6 in the previous month. Conversely, the PMI Services index increased to 56.0, a 28-month high, up from 55.3. Consequently, the PMI Composite rose to 55.0, marking a 27-month high.

From an output perspective, growth has become increasingly imbalanced, with the manufacturing sector slipping back into contraction while the service sector continues to strengthen. Some of the decline in manufacturing output was attributed to staff shortages, which could be temporary as the sector reports improved confidence in future growth prospects. Nonetheless, both manufacturers and service providers are experiencing heightened uncertainty surrounding the upcoming election, which is dampening investment and hiring activities.