BoC cuts rates as expected/US PMI rundown/New home sales and Redfin said what Zillow said

As expected the Bank of Canada cut its benchmark rate by 25 bps to 4.50%. This is now their 2^nd 25 bps cut this year while they continue on with “balance sheet normalization,” aka, shrinking it.

They said, “Broad inflationary pressures are easing” but “shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation. Inflation is also elevated in services that are closely affected by wages, such as restaurants and personal care.” They expect inflation to settle “around the 2% target next year.” If it were only so easy I say.

Their bottom line for cutting, “With broad price pressure continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 bps.” They did lay out the factors they are balancing, “excess supply” lowering inflation on one hand but persistent shelter and services inflation, as stated, on the other.

They didn’t hint in the rest of the statement as to when they might move again. While the Canadian$ is little changed, the 2 yr yield is down by 10 bps to 3.61%, the lowest since May 2023.

Bottom line, let’s assume that the 2% inflation target is magically achieved next year, sustainably, the debate for central bankers will heat up on what the proper REAL rate should be. Are we going back to pre GFC where it was around 200-250 bps or post where the Federal Reserve in particular created their R* model that told them it was just .50% after the long period of negative we endured. As inflation volatility is here to stay I believe after the current moderation, I see it closer to the upper end of this range.