To stimulate the Canadian economy, the Bank of Canada today cut its overnight policy interest rate by 50 basis points to 3.75%. This was the Bank’s 7th and penultimate decision of 2024 and means we have now seen four consecutive rate cuts since June – although the latest is the largest.
Below, we summarize the rationale for this move by summarizing the Bank’s observations, along with its forward-looking comments.
Canadian Inflation
- Inflation measured by the Consumer Price Index declined significantly from 2.7% in June to 1.6% in September
- Inflation in shelter costs remains elevated but has begun to ease
- Excess supply elsewhere in the economy has reduced inflation in the prices of many goods and services
- 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 2.5% and with inflationary pressures no longer broad-based, business and consumer inflation expectations have largely normalized
- The Bank expects inflation to remain close to its 2% target over its “projection horizon,” with the upward and downward pressures on inflation “roughly balancing out”
Canadian Economic Performance and Outlook
- The Canadian economy grew at around 2% in the first half of the year and the Bank expects growth of 1.75% in the second half of 2024
- Consumption has continued to grow but is declining on a per-person basis
- Exports have been boosted by the opening of the Trans Mountain Expansion pipeline
- The labour market remains soft with the unemployment rate at 6.5% in September
- Population growth has continued to expand the labour force while hiring has been modest and this has particularly affected young people and newcomers
- Wage growth remains elevated relative to productivity growth
- Overall, the economy continues to be in “excess supply”
Canadian Economic and Housing Market Outlook
- Canadian GDP growth is forecast to strengthen gradually over the Bank’s projection horizon, supported by lower interest rates
- This forecast largely reflects the net effect of a gradual pickup in consumer spending per person and slower population growth
- Residential investment growth is also projected to rise as strong demand for housing lifts sales and 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
- Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026 and that as the Canadian economy strengthens, excess supply will be gradually absorbed
Global Economic Performance and Outlook
- The Bank expects the global economy to expand at a rate of about 3% over the next two years
- Growth in the United States is now expected to be stronger than previously forecast while the outlook for China remains subdued
- 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, in part because of market expectations of lower policy interest rates
- Global oil prices are about $10 lower than assumed in the Bank’s July Monetary Policy Report
Summary Comments and Outlook
In today’s announcement, the Bank said that with inflation now back around its 2% target, it decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of its 1% to 3% target range.
It went on to note that “if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further.” However, it also cautioned that the timing and pace of further reductions will be guided by incoming information and the implications of that information for the inflation outlook.
Ultimately, the Bank said it will take decisions “one meeting at a time.” And added that it is committed to maintaining price stability for Canadians by keeping inflation close to its 2% target.
Next Up
The Bank is scheduled to make one more rate decision in 2024 on December 11th. First National will provide an executive summary immediately following that announcement. In the meantime, please visit the Resources page of this website for other important insights.