The Bank of Canada has lowered its target for the overnight rate by 50 basis points to 3.75%, with the Bank Rate set at 4% and the deposit rate at 3.75%. The Bank continues its policy of balance sheet normalization.
Globally, the Bank expects economic growth to average around 3% over the next two years. Growth in the United States is now projected to be stronger than previously expected, while China’s outlook remains subdued. Although growth in the euro area has been weak, a modest recovery is anticipated next year. Inflation in advanced economies has decreased recently and is approaching central bank targets. Global financial conditions have eased since July, partly due to market expectations of lower interest rates. Additionally, global oil prices are about $10 lower than previously assumed in the July Monetary Policy Report (MPR).
In Canada, the economy grew by about 2% in the first half of the year, and growth of 1.75% is expected for the second half. While consumption has continued to rise, it is slowing on a per-person basis. Exports have been boosted by the start of operations of the Trans Mountain Expansion pipeline. The labor market remains weak, with the unemployment rate standing at 6.5% in September. Population growth has expanded the labor force, but hiring has been modest, particularly affecting younger people and newcomers to Canada. Wage growth remains high relative to productivity growth, and overall, the economy is still operating with excess supply.
According to the BOC, GDP growth is expected to gradually strengthen over the projection period, supported by lower interest rates. This forecast largely reflects a gradual increase in consumer spending per person and slower population growth. Residential investment is also projected to rise, driven by solid housing demand, which is expected to boost both home sales and renovation spending. Business investment is anticipated to strengthen as demand picks up, and exports should remain robust, bolstered by strong demand from the U.S.
The Bank projects GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026, with excess supply gradually absorbing as growth strengthens.
Inflation dropped from 2.7% in June to 1.6% in September and has seen significant declines. Although shelter costs remain high, they are starting to ease. Excess supply in the economy has reduced inflation in many goods and services and falling global oil prices have led to lower gasoline costs. These factors have collectively brought inflation down. The Bank’s preferred core inflation measures are now below 2.5%. With inflationary pressures no longer widespread, both business and consumer inflation expectations have largely returned to normal levels.
The Bank expects inflation to remain close to its target over the projection horizon, with upward and downward pressures on inflation roughly balanced. The upward pressure from shelter and other services is expected to ease, while the downward pressure on inflation will diminish as excess supply in the economy is absorbed.
Given that inflation is now around the 2% target, the Bank’s Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation within the 1% to 3% range. If the economy follows the Bank’s latest forecast, further policy rate reductions are anticipated. However, the timing and pace of any additional cuts will depend on incoming data and its impact on the inflation outlook, with decisions being made on a meeting-by-meeting basis. The Bank remains committed to maintaining price stability by keeping inflation close to the 2% target.
https://www.bankofcanada.ca/2024/10/fad-press-release-2024-10-23/
https://www.bankofcanada.ca/multimedia/press-conference-monetary-policy-report-october-2024/
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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