The Bank of Canada dropped the benchmark interest rate a quarter point to 4.25 per cent Wednesday, and indicated that more cuts are coming, although governor Tiff Macklem refused to commit to a timeline. 

Inflation down, but not out: The consumer price index increased 2.5 per cent in July from a year earlier, comfortably inside the Bank of Canada’s comfort zone of one per cent to three per cent. Macklem isn’t satisfied. The target is two per cent and the governor remains resolute he will hit it. “The economy functions well when inflation is around two per cent,” he said in a statement.

The share of components of the consumer price index that are growing faster than three per cent is back at its historical norm, a sign that upward inflationary pressures are no longer a threat. Yet some components matter more than others. Macklem described shelter costs as “still too high” and observed that inflation in some services is “elevated.” The latter are especially influenced by wage growth, which the central bank also described as elevated. 

Don’t overdo it: The Bank of Canada set aside its concerns about inflation and cut interest rates because policymakers are wary of the growth outlook. Macklem said recent indicators suggest the central bank’s forecast of stronger economic output over the second half of the year is in doubt, while hiring has effectively stalled. 

“We are determined to get inflation down to the two per cent target, and we want it to stay there,” Macklem said. “We care as much about inflation being below the target as we do above.”

Where to from here: Economists at Citibank and Desjardins think the Bank of Canada may have fallen behind the curve and will have to start cutting rates at a faster pace to avoid a recession. The central bank has now cut interest rates at three consecutive policy meetings, so the direction of travel is clear. 

“If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts to our policy rate,” Macklem said. But after losing his grip on inflation, he’s unwilling to commit to more until the evidence is clear upward price pressures have been truly crushed. “We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.” 

The bank’s next policy announcement is set for Oct. 23.