The Bank of Canada has made significant adjustments to its monetary policy. The target for the overnight rate has been reduced to 4.75%, with the Bank Rate set at 5% and the deposit rate at 4.75%. Notably, the Bank is continuing its balance sheet normalization policy, a key strategy in the current economic landscape.

Globally, the economy grew by about 3% in the first quarter of 2024, aligning closely with the projections in the Bank’s April Monetary Policy Report (MPR). In the United States, economic expansion was slower than expected due to weak exports and inventory reductions despite strong but easing private domestic demand. The euro area saw increased activity in the first quarter, while China experienced stronger growth driven by exports and industrial production despite weak domestic demand. Inflation in most advanced economies is easing, albeit unevenly and at varying speeds across regions. Oil prices have remained close to MPR assumptions, and financial conditions have remained stable since April.

In Canada, the economy has shown signs of resilience. Economic growth resumed in the first quarter of 2024, following a stall in the latter half of the previous year. First-quarter GDP growth was 1.7%, slower than the MPR forecast, primarily due to weaker inventory investment. However, consumption, business investment, and housing activity all saw increases, indicating a robust economic performance. Despite these positive indicators, labor market data suggests that employment growth is lagging behind the growth of the working-age population, and wage pressures persist. These factors are key considerations in the Bank of Canada’s monetary policy decisions.

CPI inflation eased further to 2.7% in April. The Bank’s preferred measures of core inflation also slowed, with three-month measures indicating ongoing downward momentum. The breadth of price increases across CPI components has narrowed, nearing historical averages, although shelter price inflation remains high.

This cut signifies a turning point in one of the most aggressive tightening cycles in the Bank of Canada’s history. Since March 2022, the bank has raised its benchmark rate by 475 basis points to 5 percent.

Macklem previously cautioned that cutting rates too early or too quickly could jeopardize the progress made in reducing inflation. On Wednesday, he stated that if inflation continues to align with the central bank’s 2 percent target, “it is reasonable to expect further cuts to our policy interest rate.”

“But we are taking our interest rate decisions one meeting at a time,” he emphasized.

“We don’t want monetary policy to be more restrictive than necessary to get inflation back to target. However, lowering our policy interest rate too quickly could jeopardize the progress we’ve made.”1


Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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