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Comparison of Interest Rate Trajectories: Federal Reserve vs Bank of Canada

As the Bank of Canada made the bold move to kick off an easing cycle by cutting the benchmark lending rate, the Canadian economy was left in a state of anticipation. The decision to lower the rate by a quarter of a percentage point to 4.75% was widely expected, but it still caused some selling in the Canadian dollar.

In a recent interview with Bat Cary, Chief Economist at TD Bank, he shared insights on the decision and the potential future moves of the central bank. While the market is pricing in another two cuts in September and December, Cary emphasized the importance of caution around inflation and the need for the Bank of Canada to carefully monitor various economic factors.

One of the key concerns for the central bank is the potential for an undue rebound in the housing market, which could lead to higher inflation. Additionally, geopolitical tensions and disruptions in supply chains could also contribute to inflationary pressures.

When it comes to the Canadian dollar, Cary noted that stability has been a key factor in recent years, with the currency trading within a range of 72 to 76 cents against the US dollar. However, if the currency were to drop below 70 cents, it could raise concerns about foreign investor interest in Canada.

Despite the potential risks and uncertainties, Cary remains optimistic about the Canadian economy, citing strong consumer spending and population growth as factors that could help prevent a recession. While there is always a risk of economic downturn, Cary estimates the probability of a recession in Canada at around 30% at this time.

Overall, the decision by the Bank of Canada to kick off an easing cycle has sparked discussions and debates about the future of the Canadian economy. As the central bank continues to navigate through various challenges and uncertainties, all eyes will be on how the economy responds to these changes in the coming months.

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