Date: October 23, 2024
In a significant move to support the Canadian economy, the Bank of Canada has announced a reduction in its target overnight rate by 50 basis points, bringing it down to 3¾%. This decision aims to bolster economic growth while keeping inflation in check, with the current Bank Rate now set at 4% and the deposit rate also at 3¾%.
Economic Context
The global economic outlook remains cautiously optimistic, with expectations of a 3% growth rate over the next two years. Notably, the U.S. economy is projected to perform better than earlier predictions, while growth in China appears subdued. The euro area has shown signs of weakness but is expected to recover modestly in the coming year.
In Canada, the economy has shown a growth rate of around 2% in the first half of 2024, with a forecasted slowdown to 1¾% in the second half. Despite a rise in consumption, it’s worth noting that consumption per person has been declining. Positive factors, such as the opening of the Trans Mountain Expansion pipeline, have helped boost exports. However, the labour market continues to face challenges, with the unemployment rate sitting at 6.5% as of September.
Inflation Trends
One of the most noteworthy developments is the significant decline in the consumer price index (CPI) inflation, which fell from 2.7% in June to 1.6% in September. While shelter costs remain high, they are beginning to ease, and the overall excess supply in the economy has contributed to lower prices for many goods and services. A decrease in global oil prices has further helped reduce gasoline prices, aiding in the overall decline of inflation.
The Bank's core inflation measures are now below 2½%, indicating that inflationary pressures are no longer as widespread. With the current inflation rate approaching the 2% target, the Governing Council believes that this rate cut will foster economic growth while stabilizing prices.
Looking Ahead
The Bank of Canada forecasts GDP growth of 1.2% in 2024, rising to 2.1% in 2025 and 2.3% in 2026, as the economy gradually strengthens and excess supply is absorbed. Key drivers for this growth include a gradual increase in consumer spending, rising residential investment, and a rebound in business investment as demand picks up.
Moving forward, the Bank has indicated that further reductions in the policy rate may occur, contingent upon economic conditions and inflation trends. The next scheduled announcement regarding the overnight rate target is set for December 11, 2024, with a comprehensive economic outlook to be released on January 29, 2025.
Conclusion
This recent rate cut is a strategic move by the Bank of Canada aimed at stimulating economic growth while keeping inflation within target levels. As we navigate these changing economic waters, it will be essential for businesses and consumers to stay informed about potential implications for borrowing, spending, and overall economic health.
Stay tuned for more updates and insights as the situation evolves!
