In a move aimed at supporting economic growth, the Bank of Canada has announced a reduction in its policy rate by 50 basis points, bringing the new target for the overnight rate to 3¼%. This decision also adjusts the Bank Rate to 3¾% and the deposit rate to 3¼%. The Bank continues its policy of balance sheet normalization.
According to the Bank’s October Monetary Policy Report, the global economy is progressing largely as anticipated. The United States has maintained a strong economy with robust consumption and a solid labor market, while inflation rates remain steady. The euro area is experiencing signs of weaker growth, and China is seeing some economic support from policy actions and strong exports, despite subdued household spending. Global financial conditions have relaxed, and the Canadian dollar has weakened against a broadly strong US dollar.
Canada’s economic growth was reported at 1% for the third quarter, slightly below the Bank’s earlier projections, with the fourth quarter also expected to underperform. Factors such as business investment, inventories, and exports have contributed to the downturn, while consumer spending and housing activity have increased, indicating that lower interest rates are starting to influence household spending. Revisions to the National Accounts have shown an increased GDP level over the past three years, primarily due to higher investment and consumption. The unemployment rate in Canada increased to 6.8% in November, with employment growth lagging behind the labor force. Wage growth has shown signs of slowing but remains high concerning productivity.
Policy measures that are set to impact near-term growth and inflation in Canada include targeted reductions in immigration levels, which are expected to result in GDP growth falling below the Bank’s October forecast for next year. The impact on inflation is predicted to be less significant, as lower immigration tends to dampen both demand and supply. Additional federal and provincial policies, such as a temporary suspension of the GST on certain consumer products, one-time payments to individuals, and changes to mortgage rules, will also influence demand and inflation dynamics. The Bank intends to focus on underlying trends rather than temporary effects when guiding its policy decisions.
The prospect of new tariffs on Canadian exports to the United States by the incoming US administration has introduced further uncertainty into the economic forecast.
The Consumer Price Index (CPI) inflation has remained around 2% since the summer and is projected to stay close to the 2% target over the next couple of years. Both the upward pressure from shelter costs and the downward pressure from goods prices have moderated as expected since October. The temporary GST holiday is anticipated to lower inflation temporarily, with the effect reversing after the holiday ends. Core inflation measures will be used to assess the CPI inflation trend.
With the economy operating in excess supply and recent indicators pointing to softer growth than expected, the Governing Council chose to lower the policy rate to help sustain growth and maintain inflation near the mid-point of the 1-3% target range. The policy rate has been significantly reduced since June, and the Bank will consider the need for further rate cuts on a decision-by-decision basis, guided by incoming data and the inflation outlook. The Bank reaffirms its commitment to maintaining price stability by keeping inflation near the 2% target.
The next announcement on the overnight rate target is scheduled for January 29, 2025, when the Bank will also publish its full economic and inflation outlook in the Monetary Policy Report.
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