The Bank of Canada has announced a reduction in its target for the overnight rate by 25 basis points, bringing it down to 4¼%. Correspondingly, the Bank Rate is set at 4½% and the deposit rate at 4¼%. This move aligns with the Bank’s ongoing commitment to balance sheet normalization.
Globally, the economy saw a 2½% growth in the second quarter, as outlined in the Bank’s July Monetary Policy Report (MPR). The United States experienced stronger-than-expected economic growth, driven by consumer spending, although the labour market has shown signs of slowing. In the Euro area, growth has been bolstered by tourism and service industries, while manufacturing remains weak. Both regions are witnessing moderating inflation rates. China, however, faced challenges with weak domestic demand impacting its economic performance. Since July, global financial conditions have eased further, contributing to a decline in bond yields, and the Canadian dollar has seen modest appreciation due to a weaker US dollar. Additionally, oil prices are currently lower than projected in the July MPR.
In Canada, the economy experienced a 2.1% growth in the second quarter, largely driven by government spending and business investment, slightly surpassing earlier forecasts. However, initial indicators suggest a softening in economic activity through June and July. The labour market continues to decelerate, with minimal changes in employment figures in recent months, although wage growth remains high relative to productivity.
Inflation in Canada has continued its downward trend, reaching 2.5% in July. Core inflation, as preferred by the Bank, averaged around 2½%, with the proportion of CPI components growing above 3% aligning with historical norms. Shelter price inflation remains the largest contributor to overall inflation, although it is beginning to slow. Inflation in other services also remains elevated.
Given the ongoing reduction in broad inflationary pressures, the Bank’s Governing Council has decided to lower the policy interest rate by an additional 25 basis points. The presence of excess supply in the economy is exerting downward pressure on inflation, although rising prices in shelter and other services are sustaining inflationary pressures. The Governing Council is closely monitoring these opposing forces and will continue to guide monetary policy decisions based on incoming data and its implications for the inflation outlook. The Bank remains steadfast in its commitment to restoring price stability for Canadians.
Next Steps:
The Bank of Canada will announce the next overnight rate target on October 23, 2024. At that time, the Bank will also release its next full outlook on the economy and inflation, including potential risks to the projections, in the upcoming MPR.
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Sources: https://www.bankofcanada.ca/2024/09/fad-press-release-2024-09-04/
