The Bank of Canada has made a significant move to support economic growth and stability by reducing its policy rate. This decision reflects the current economic conditions and forecasts for the global and Canadian economies. In this blog, we will delve into the details of this rate cut, its implications, and the economic outlook for the coming years.

Key Highlights:

• Policy Rate Change: The Bank of Canada has lowered its target for the overnight rate to 4.5%, with the Bank Rate at 4.75% and the deposit rate at 4.5%. This move is part of the Bank’s ongoing policy of balance sheet normalization.

Global Economic Outlook:

• Global Growth: The global economy is expected to expand at an annual rate of about 3% through 2026.
• Inflation Trends: Inflation remains above targets in most advanced economies but is forecasted to ease gradually.
• Regional Insights: The US is experiencing a slowdown with moderated consumption growth. The euro area is recovering from a weak 2023, and China’s growth is modest, driven by strong exports despite weak domestic demand.

Canadian Economy:

• Growth Trends: Economic growth in Canada likely picked up to about 1.5% through the first half of 2024.
• Population and GDP: With a robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, increasing excess supply.
• Household Spending: Both consumer purchases and housing spending have been weak.
• Labour Market: Signs of slack with the unemployment rate at 6.4%, slower employment growth, and elevated wage growth showing signs of moderation.

Forecast:

• GDP Growth: Expected to be 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026.
• Inflation: CPI inflation moderated to 2.7% in June and is expected to slow to about 2.5% in the second half of 2024, easing further through 2025.

Monetary Policy:

• Interest Rate Cut: The reduction in the policy interest rate by 25 basis points aims to ease inflationary pressures while balancing price stability.
• Future Decisions: The Bank of Canada will continue to assess economic data and inflation trends to guide future monetary policy decisions, remaining committed to restoring price stability for Canadians.

The next rate announcement is scheduled for Sept 24.

Source:Bank of Canada