Bank of Canada Cuts Policy Rate by 50 Basis Points to 3.75%

The Bank of Canada has lowered its target for the overnight rate 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 efforts to normalize its balance sheet.

Globally, the Bank expects the economy to grow at around 3% over the next two years. U.S. growth is now projected to be stronger than earlier forecasts, while China’s outlook remains weak. The euro area’s growth has been sluggish but is expected to improve modestly next year. Inflation in advanced economies has decreased and is close to central bank targets. Since July, global financial conditions have eased partly due to expectations of lower interest rates. Meanwhile, global oil prices have dropped by about $10 compared to the assumptions in July’s Monetary Policy Report (MPR).

In Canada, the economy expanded by approximately 2% during the first half of the year, with growth projected at 1.75% for the second half. Consumption continues to rise, though it’s slowing on a per capita basis. Exports have increased, boosted by the opening of the Trans Mountain Expansion pipeline. The labor market remains weak, with unemployment at 6.5% in September. Population growth has expanded the labor force, but hiring has been modest, particularly affecting young people and newcomers. Wage growth continues to outpace productivity. Overall, the economy remains in a state of excess supply.

The Bank forecasts gradual GDP growth over the projection period, driven by lower interest rates. This outlook reflects a gradual increase in per capita consumer spending and slower population growth. Residential investment is expected to rise, supported by strong housing demand. Business investment is projected to strengthen, and exports should remain robust, driven by strong U.S. demand.

The Bank’s forecast projects GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026. As the economy gains strength, excess supply is expected to be absorbed.

Inflation, which dropped from 2.7% in June to 1.6% in September, has eased significantly. Although shelter costs remain elevated, they are starting to decline. The excess supply in the economy has reduced inflationary pressures on many goods and services, while lower global oil prices have led to cheaper gasoline. These factors have contributed to the decline in inflation, with the Bank’s core inflation measures now below 2.5%. Inflation expectations among businesses and consumers have normalized.

The Bank expects inflation to stay close to its target range over the forecast period, with upward and downward pressures on inflation balancing out. As shelter costs and other service-related inflationary pressures diminish and excess supply is absorbed, inflation should stabilize.

With inflation near the 2% target, the Bank’s Governing Council has cut the policy rate by 50 basis points to support economic growth and maintain inflation near the middle of its 1% to 3% target range. Should the economy align with the Bank’s projections, further rate cuts are anticipated, though the pace and timing will depend on future data and its implications for the inflation outlook. The Bank will take decisions on a meeting-by-meeting basis and remains committed to keeping inflation close to its 2% target to ensure price stability for Canadians.