Bank of Canada Reduces Policy Rate By 50 Basis Points to 3¾ Per Cent

The Bank of Canada has reduced its target for the overnight rate to 3¾ per cent, with the Bank Rate at 4 per cent and the deposit rate at 3¾ per cent, announced on Wednesday morning.

Tiff Macklem, Govenor, Bank of Canada. Screenshot.

The Bank expects the global economy to expand at about 3 per cent over the next two years. Growth in the United States is now expected to be stronger than previously forecasted, while China's outlook remains subdued according to a press release. It continues to state that growth in the euro area has been soft but should recover modestly next year. Inflation in advanced economies has declined in recent months and is now around central bank targets. Global financial conditions have eased since July, partly because of market expectations of lower policy interest rates. Global oil prices are about $10 lower than assumed in the July Monetary Policy Report (MPR).

In Canada, the economy grew at around 2 per cent in the first half of the year and we expect growth of 1¾ per cent in the second half. Consumption has continued to grow but is declining on a per-person basis. The opening of the Trans Mountain Expansion pipeline has boosted exports according to the Bank of Canada. The labour market remains soft—the unemployment rate was at 6.5 per cent in September. Population growth has continued to expand the labour force while hiring has been modest. This has particularly affected young people and newcomers to Canada. Wage growth remains elevated relative to productivity growth. Overall, the economy continues to have an excess supply.

GDP growth is forecast to strengthen gradually over the projection horizon, supported by lower interest rates. This forecast primarily reflects the net effect of a gradual pick-up in consumer spending per person and slower population growth. Residential investment growth is also projected to rise as the strong demand for housing lifts sales and increases spending on renovations. Business investment is expected to strengthen as demand picks up, and exports should remain strong, supported by robust demand from the United States.

The Bank forecasts GDP growth of 1.2 per cent in 2024, 2.1 per cent in 2025, and 2.3 per cent in 2026.

CPI inflation has declined significantly from 2.7 per cent in June to 1.6 per cent in September. Inflation in shelter costs remains elevated but has begun to ease. Excess supply elsewhere in the economy has reduced inflation in many goods and services prices. The drop in global oil prices has led to lower gasoline prices. These factors have all combined to bring inflation down. The Bank’s preferred measures of core inflation are now below 2½ per cent. With inflationary pressures no longer broad-based, business and consumer inflation expectations have largely normalized.

Bank of Canada expects inflation to remain close to the target over the projection horizon, with the upward and downward pressures on inflation roughly balancing out. The upward pressure from shelter and other services gradually diminishes, and the downward pressure on inflation recedes as excess supply in the economy is absorbed.

With inflation now around the 2 per cent target, Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1 per cent to 3 per cent range. If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further. However, the timing and pace of further reductions in the policy rate will be guided by incoming information and our assessment of its implications for the inflation outlook. The Bank says they are committed to maintaining price stability for Canadians by keeping inflation close to the 2 per cent target.

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