The Bank of Canada has announced a reduction in its overnight policy rate by 50 basis points, bringing it down to 3.75%, with the Bank Rate at 4% and the deposit rate also at 3.75%. This decision is part of the Bank’s ongoing balance sheet normalization policy.
Key Highlights:
- Global Economic Outlook: The Bank projects a global economic growth rate of approximately 3% over the next two years. While the U.S. economy shows stronger growth prospects, China’s outlook remains subdued, and the euro area is anticipated to experience modest recovery next year. Inflation in advanced economies has been declining, and global financial conditions have eased, partly due to market expectations of lower interest rates. Global oil prices are around $10 lower than assumed in the July Monetary Policy Report.
- Canadian Economic Performance: Canada’s economy grew by around 2% in the first half of the year, with a projected growth rate of 1.75% in the latter half. Consumption has been growing but is declining on a per-person basis, and the labour market remains soft, with an unemployment rate of 6.5% in September. Population growth has expanded the labour force, but hiring remains modest. Wage growth remains high compared to productivity gains, leading to an overall economy characterized by excess supply.
- Future Growth Projections: GDP growth is expected to gradually strengthen due to lower interest rates. The Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026. A gradual pick-up in consumer spending, stronger residential investment, and robust business investment are expected to support this growth, alongside strong demand from the U.S. market.
- Inflation Outlook: CPI inflation has declined from 2.7% in June to 1.6% in September, with core inflation measures now below 2.5%. The reduction in inflationary pressures, particularly in shelter costs and goods prices, has contributed to this decline. The Bank expects inflation to remain close to its 2% target, with upward pressures easing over time and the excess supply being absorbed.
Decision Rationale: The Bank’s Governing Council chose to lower the policy rate by 50 basis points to support economic growth and maintain inflation within the target range of 1% to 3%. Further rate reductions may be considered based on future economic developments and inflation trends.
Commitment: The Bank remains committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.