Over-inflation fears are so yesterday. Hip central bankers are now scared of under-inflation.
What happened: Tiff Macklem and the Bank of Canada (BoC) didn’t pull off any last-minute surprises, cutting Canada’s benchmark overnight rate to 4.25%, just as analysts expected. Macklem’s comments implied that rate cuts would keep coming.
Why it matters: With inflation slipping, a new fear is keeping the nation’s central bankers up at night: inflation falling below the 2% inflation target. While that might sound like a desirable outcome, the BoC has determined that 2% growth is, as Goldilocks would say, just right.
- A dash of inflation helps keep the economy humming. If inflation gets too low, it cuts into wage growth, disincentivizes investment, and, ultimately, risks deflation.
Zoom out: Super-low inflation is also a sign of a struggling economy, which is the BoC’s other chief concern. While Canada’s GDP eclipsed expectations last quarter, growth was stagnant in June and likely July, with the GDP propped up by immigration.
What’s next: Analysts expect two more rate cuts of 25 percentage points apiece for the rest of the year, but the BoC warned that it’s not afraid of a larger cut if things get hairy.—QH