On Wednesday, July 24th at 21:45, the Bank of Canada lowered its benchmark interest rate for the second consecutive month, by 25 basis points to 4.50%. The central bank stated that the weight of downward inflation risk in its deliberations is increasing.

Analysts say that the Bank of Canada is shifting its focus to boosting the economy rather than curbing inflation, which increases the likelihood of further interest rate cuts in the coming months.

Investors believe that the likelihood of the Bank of Canada relaxing policy again at its next policy meeting in September is about 60%. Investors expect a total of 44 basis points in interest rate cuts before the end of this year, which means the policy rate is 6 basis points lower than previously expected. The next decision of the Bank of Canada will be held on September 5th.

Accelerating the pace of interest rate cuts will alleviate the pressure on heavily indebted Canadian households. This may also increase the pressure on the Canadian dollar. The Canadian dollar weakened on Thursday, while the USD/CAD rose to a three-month high of 1.3848 and entered Friday to maintain high volatility.

Philip Petursson, Chief Investment Strategist at IG Wealth Management, said, "The Bank of Canada's shift in focus from winning the battle against inflation to more necessary economic support indicates a reversal in its policies

Canada's GDP growth rate in recent quarters has been below the trend growth rate of 2.25% estimated by the Bank of Canada, with a growth rate of 1.7% in the first quarter.

The slowdown in GDP growth has led to an oversupply of the economy and a cooling of inflation, with an inflation rate of 2.7% in June. However, if the economy is too weak, the degree of inflation slowdown may exceed the expectations of the central bank.

Although high interest rates did not cause the Canadian economy to fall into recession, economists say that economic growth is mainly driven by a significant increase in population.

McClelland stated on Wednesday that the bank not only focuses on overall economic growth, but also on per capita GDP, which has been declining for four consecutive quarters.

Jason Daw and Simon Deeley, strategists at RBC Dominion Securities Inc, said in a report, "The Bank of Canada's stance is as dovish as possible

These two strategists said, "Only one inflation report will be released before the next meeting, and the threshold for the central bank not to cut interest rates is very high

Charu Chanana, head of foreign exchange strategy at Saxo Bank, believes that the spread between the Bank of Canada and the Federal Reserve is widening, which could make the Canadian dollar more fragile. However, the upcoming political developments in the United States and market expectations for the Federal Reserve's actions may also affect the performance of the Canadian dollar.

Daily chart of USD/CAD exchange rate