On December 11, 2024, the Bank of Canada announced a reduction in its target for the overnight rate by 50 basis points, bringing it down to 3.25%. The Bank Rate is now set at 3.75%, and the deposit rate remains at 3.25%. This move is part of the Bank's ongoing effort to normalise its balance sheet following the pandemic's economic disruptions.
Economic Outlook: A Mixed Picture
The global economy is largely evolving as expected, with some notable differences across regions. In the United States, economic strength continues, fuelled by robust consumer spending and a healthy labour market. Inflation in the US has remained steady, with certain price pressures persisting. Meanwhile, the euro area is seeing signs of slower growth, and while China’s growth is being supported by strong exports and policy actions, domestic consumer spending remains subdued.
For Canada, the outlook is more tempered. The economy grew by just 1% in the third quarter, which is below the Bank's previous expectations. The fourth quarter also looks weaker than initially forecasted. Business investment, exports, and inventories were some of the major factors holding back growth. However, consumer spending and housing activity have picked up, suggesting that lower interest rates are starting to stimulate household spending. The unemployment rate in Canada rose to 6.8% in November, as employment growth lagged behind the growth in the labour force.
Government Measures Affecting Inflation and Growth
Several new policy measures are expected to impact both inflation and economic growth in the short term. The Canadian government has announced a reduction in immigration targets, which will likely result in lower GDP growth for 2025 than the Bank’s previous forecast. While this could dampen both demand and supply, the effects on inflation are expected to be muted. Additional federal and provincial measures, such as the temporary suspension of the GST on certain consumer goods, one-time payments to individuals, and changes to mortgage rules, will also influence demand and inflation trends.
The possibility of new tariffs on Canadian exports to the US, under the incoming administration, adds another layer of uncertainty to the economic outlook.
Inflation and Interest Rate Decisions
Consumer Price Index (CPI) inflation in Canada has remained around 2% since the summer, and the Bank expects it to stay close to this target over the next few years. This is a positive sign, as the Bank of Canada's primary goal is to keep inflation close to its 2% target. Despite some moderate upward pressure from housing costs and downward pressure from goods prices, inflation is expected to remain stable in the near term.
In light of the softer-than-expected growth and the ongoing inflationary pressures, the Bank decided to reduce the policy rate by 50 basis points. This action aims to support economic growth and help keep inflation within the target range of 1-3%. The Bank has already significantly reduced the policy rate since June and will continue to assess the need for further rate cuts on a case-by-case basis.
Looking Ahead
The Bank of Canada remains committed to maintaining price stability and fostering sustainable growth. The next scheduled rate announcement will take place on January 29, 2025, with a full economic outlook and inflation forecast expected at that time.
As always, the Bank’s decisions will be guided by incoming data and its ongoing assessment of the economic landscape, focusing on the long-term goal of keeping inflation near its target while supporting the broader Canadian economy.
