The Bank of Canada has lowered its key interest rate by another 25 basis points.
The overnight rate now stands at 4.5 per cent, down from 4.75 per cent.
It is the second consecutive drop following a similar cut in early June.
Governor Tiff Macklem said inflation continues to get closer to their two per cent target.
But he cautioned that progress over the next year will likely be gradual and uneven.
“The overall weakness in the economy is pulling inflation down. At the same time, price pressures in shelter and some other services are holding inflation up,” Macklem said on Wednesday.
“We are increasingly confident that the ingredients to bring inflation back to target are in place. But the push-pull of these opposing forces means … there could be setbacks along the way.”
Economic growth in Canada has picked up but remains weak relative to population growth, said the Bank of Canada governor.
Household spending has been soft, with pent-up demand for things like new cars and travel fading. There is also less discretionary spending as many families are set aside more of their income for debt payments.
Macklem said with the economy in excess supply and slack in the labour market, the economy has more room to grow without creating inflationary pressures.
CPI inflation moderated to 2.7 in June after increasing in May, and broad inflationary pressures continued to ease, he said.
While CPI inflation is forecast to come down below core inflation this fall and settle sustainably around the two per cent target next year, the governor noted there are risks around the outlook.
“Here in Canada, the biggest downside risk is that household spending could be weaker than expected. On the upside, inflation in shelter and other services could prove more persistent,” said Macklem.
“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out.”
The next interest rate decision is scheduled for Sept. 4.
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