Spurred on by underlying trends in the Canadian economy, the Bank of Canada today cut its overnight policy interest rate by 0.25% to 4.25%. This is the third reduction we’ve seen this year and while all cuts have been modest, they are moving Canada toward less restrictive monetary policy.
We summarize the Bank’s rationale for this decision by summarizing its observations below, including its forward-looking comments for signs of what may happen next.
Canadian inflation
- As expected, inflation slowed further to 2.5% in July
- The Bank’s preferred measures of core inflation averaged around 2.5%
- The “share of components” of the consumer price index are growing above 3%, roughly at their historical norm
- High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services
Canadian economic performance and outlook
- In Canada, the economy grew by 2.1% in the second quarter – led by government spending and business investment – and this rate was “slightly stronger” than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July
- The Canadian labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity
Global economic performance and outlook
- The global economy expanded by about 2.50% in the second quarter, consistent with projections in the Bank’s July Monetary Policy Report
- In the United States, economic growth was stronger than expected, led by consumption, but the labour market has slowed
- Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft
- Inflation in both regions continues to moderate. In China, weak domestic demand weighed on economic growth
- Global financial conditions have eased further since July, with declines in bond yields. The Canadian dollar has appreciated modestly, largely reflecting a lower US dollar. Oil prices are lower than assumed in July
Summary comments and outlook
In making today’s decision, the Bank noted that excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. As a result, Governing Council is “carefully assessing” these opposing forces on inflation. Monetary policy decisions will be guided, therefore, by incoming information and the Bank’s assessment of the implications for the inflation outlook.
And has it has been doing for some time, the Bank said it “remains resolute” in its commitment to restoring price stability for Canadians.”
Next up
The Bank returns on October 23rd with its next monetary policy announcement. First National will provide an executive summary immediately following. In the meantime, please visit the Resources page of this website for other important insights.