The Bank of Canada (BoC) reduced its key policy rate by 25 basis points to 4.25% on Wednesday, marking the third consecutive rate cut since June.

The move was widely anticipated by market participants as inflation and the labor market continued to show signs of slowing.

The Canadian economy grew by 2.1% in the second quarter, led by government spending and business investment. However, the labor market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.

During a press conference, Governor Tiff Macklem suggested that further rate cuts may be on the horizon if inflation continues to ease as expected.

“If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate,” Macklem said.

Inflation cooled to 2.5% in July, aligning with the BoC's target range. Core inflation measures also averaged around 2.5%, but the central bank noted that high shelter price inflation remains the biggest contributor to overall inflation. Shelter costs are now finally starting to ease.

Market Reactions

Canadian markets reacted positively on Wednesday following the Bank of Canada's decision to cut interest rates. Investors showed optimism, pushing both stocks and bonds higher.

Yields on Canadian 10-year Treasury bonds dropped by 5 basis points to 3.2%, reflecting increased demand for government debt. The Canadian dollar or Loonie rose 0.3% to 1.35 levels against the dollar.

Canadian equities rebounded, with the iShares MSCI Canada ETF (NYSE:EWC) rising 0.6%, while the Franklin FTSE Canada ETF (NYSE:FLCA) gained 0.7%.

Wednesday’s Top Gainers in Canadian Stocks:

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