The Bank of Canada today announced a reduction in its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. This move continues the Bank’s policy of balance sheet normalization.
Global Economic Outlook
The global economy is projected to expand at an annual rate of approximately 3% through 2026. Inflation, while still above central bank targets in most advanced economies, is expected to ease gradually. In the United States, economic slowdown is becoming evident with moderated consumption growth and resumed downward inflation. The euro area is experiencing a recovery following a weak 2023, and China’s economy is showing modest growth, supported by strong exports despite weak domestic demand. Global financial conditions have improved, characterized by lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar has remained relatively stable, and oil prices are consistent with assumptions in April’s Monetary Policy Report (MPR).
Canadian Economic Conditions
In Canada, economic growth has likely increased to about 1½% in the first half of this year. Despite a robust population growth rate of approximately 3%, potential output continues to grow faster than GDP, indicating increased excess supply. Household spending, including consumer purchases and housing, remains weak, with signs of slack in the labor market. The unemployment rate has risen to 6.4%, with slower employment growth relative to the labor force and extended job search durations. Although wage growth is showing signs of moderation, it remains elevated.
Future Economic Projections
GDP growth in Canada is expected to rise in the second half of 2024 and through 2025, driven by stronger exports and a recovery in household spending and business investment as borrowing costs decrease. Residential investment is anticipated to grow robustly. With new government limits on admissions of non-permanent residents, population growth is projected to slow in 2025. The Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026, with the economy gradually absorbing excess supply through 2025 and into 2026.
Inflation Trends
CPI inflation moderated to 2.7% in June after an increase in May. Broad inflationary pressures are easing, with core inflation measures below 3% for several months. However, shelter price inflation remains high due to rent and mortgage interest costs and continues to be the largest contributor to total inflation. Inflation is also elevated in services closely affected by wages, such as restaurants and personal care.
Core inflation is expected to slow to about 2½% in the second half of 2024 and ease gradually through 2025. CPI inflation is anticipated to fall below core inflation in the latter half of this year due to base year effects on gasoline prices. Once these effects dissipate, CPI inflation may rise slightly before stabilizing around the 2% target next year.
Policy Rate Decision
With broad price pressures continuing to ease and inflation expected to approach 2%, the Governing Council has decided to reduce the policy interest rate by an additional 25 basis points. Ongoing excess supply is mitigating inflationary pressures, while price pressures in key areas such as shelter and some services are maintaining upward pressure on inflation. The Governing Council is carefully evaluating these conflicting influences on inflation. Future monetary policy decisions will be informed by incoming data and their implications for the inflation outlook. The Bank of Canada remains committed to restoring price stability for Canadians.