The Bank of Canada announced today a reduction in its target for the overnight rate to 3.75%, with the Bank Rate set at 4% and the deposit rate at 3.75%. This move is part of the central bank’s ongoing policy of balance sheet normalization, aimed at managing inflation and supporting economic growth.
Global Economic Outlook: Mixed But Stable Growth Expected
The Bank of Canada expects the global economy to grow at a rate of about 3% over the next two years, with some regions showing stronger performance than others. Growth in the United States is expected to be stronger than previously forecast, while China’s economic outlook remains subdued. In the eurozone, economic activity has been soft but is projected to recover modestly next year.
Inflation in advanced economies has declined recently and is now close to central bank targets, signaling some relief from inflationary pressures. Additionally, global financial conditions have eased, partly due to market expectations of lower policy interest rates. Global oil prices, which are about $10 lower than anticipated in the Bank’s July Monetary Policy Report, have also contributed to this shift.
Canadian Economic Growth: Slower but Steady
In Canada, the economy grew by around 2% in the first half of the year, with expectations of 1.75% growth in the second half. While consumer spending has grown, it is declining on a per-person basis, reflecting broader economic pressures. Exports, however, have seen a boost, thanks in part to the opening of the Trans Mountain Expansion pipeline.
The labor market remains soft, with an unemployment rate of 6.5% in September. Modest hiring, particularly affecting young people and newcomers, has been offset by ongoing population growth. Wage growth continues to outpace productivity, contributing to an excess supply in the economy.
The Bank forecasts GDP growth to gradually strengthen over the coming years, supported by lower interest rates. Consumer spending per person is expected to recover, while residential investment is projected to rise due to strong housing demand. Business investment and exports are also expected to remain robust, particularly driven by demand from the U.S.
GDP and Inflation Projections
The Bank of Canada is projecting GDP growth of 1.2% in 2024, followed by 2.1% in 2025 and 2.3% in 2026. As the economy strengthens, the excess supply that has persisted will gradually be absorbed, contributing to more balanced growth.
Inflation has seen a significant decline, dropping from 2.7% in June to 1.6% in September. Although shelter costs remain high, they have started to ease, and the excess supply in the economy has reduced inflation across many goods and services. Lower global oil prices have led to a reduction in gasoline prices, contributing further to the decline in inflation. The Bank’s core inflation measures are now below 2.5%, signaling that inflationary pressures have become less broad-based.
Policy Rate Reduction and Future Outlook
With inflation now hovering around the 2% target, the Bank of Canada decided to reduce the policy rate by 50 basis points. This move is intended to support economic growth and keep inflation within the Bank’s target range of 1% to 3%. The Bank has indicated that further rate cuts could be on the horizon, depending on how the economy evolves in line with its latest forecasts.
“The timing and pace of further reductions in the policy rate will be guided by incoming information and our assessment of its implications for the inflation outlook,” the Bank said. Future decisions on rate cuts will be made on a meeting-by-meeting basis.
The Bank of Canada remains focused on maintaining price stability for Canadians by keeping inflation close to its 2% target. As the economy continues to recover and inflationary pressures ease, the central bank’s decisions will be closely tied to how these factors evolve in the coming months.
