The Bank of Canada has cut its key interest rate for the second consecutive time, reducing it by a quarter percentage point to 4.5%, with the Bank Rate at 4.75% and the deposit rate at 4.5%. This decision, driven by easing price pressures and weakening economic conditions, continues the Bank’s policy of balance sheet normalization.
Governor Tiff Macklem highlighted in his prepared statement that while inflation is edging closer to the target, the path back to 2% may be uneven, influenced by economic and inflationary fluctuations. Macklem emphasized that although the Bank is increasingly confident that inflation is moving towards the target, the interplay of opposing forces—weak overall economic conditions pulling inflation down and persistent price pressures in shelter and some services holding inflation up—could affect the pace of easing price growth.
“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out,” Macklem stated, indicating that monetary policy decisions will be taken one at a time based on incoming data.
This rate cut follows the first reduction in four years last month, marking a significant shift in the Bank’s approach to tackling high inflation. High borrowing costs have led to decreased spending by consumers and businesses, which has helped alleviate price growth pressures.
Canada’s annual inflation rate dropped to 2.7% in June after a temporary increase in May. The Bank of Canada’s latest monetary policy report includes new forecasts suggesting that inflation will return to the 2% target next year. The Canadian economy, currently weak relative to population growth, is expected to strengthen in the second half of 2024, with GDP growth forecasted at 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026.
Globally, the economy is projected to grow at about 3% annually through 2026. Inflation, though still above central bank targets in advanced economies, is expected to decrease gradually. The US is experiencing an economic slowdown with moderated consumption growth and resumed downward inflation. The euro area is seeing growth after a weak 2023, while China’s economy grows modestly with strong exports. Improved global financial conditions are marked by lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar remains stable, and oil prices are consistent with April’s Monetary Policy Report.
In Canada, economic growth was around 1.5% in the first half of the year, but robust 3% population growth has led to increased excess supply as potential output exceeds GDP. Household spending, including consumer purchases and housing, remains weak. The labor market shows signs of slack, with the unemployment rate rising to 6.4%, slower employment growth, and moderating but still high wage growth.
GDP growth is expected to rise in the second half of 2024 and through 2025, driven by stronger exports, recovering household spending, and business investment as borrowing costs decrease. Residential investment is projected to grow robustly, and new government limits on non-permanent resident admissions should slow population growth in 2025. The economy is anticipated to gradually absorb excess supply through 2026.
CPI inflation moderated to 2.7% in June, with broad inflationary pressures easing. Core inflation measures have been below 3% for months, and the range of price increases across CPI components is nearing historical norms. Shelter price inflation remains high due to rent and mortgage costs.
Core inflation is expected to slow to 2.5% in the second half of 2024 and ease through 2025. CPI inflation is projected to fall below core inflation in late 2024 due to base effects from gasoline prices before stabilizing around the 2% target.
The Governing Council’s decision to reduce the policy interest rate by 25 basis points addresses excess supply, which lowers inflationary pressures, while acknowledging persistent price pressures in key sectors like shelter and services. Monetary policy decisions will be guided by incoming data to maintain price stability for Canadians.
- https://www.bankofcanada.ca/2024/07/fad-press-release-2024-07-24/
- https://www.bankofcanada.ca/multimedia/press-conference-monetary-policy-report-july-2024/
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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