Summary:
The Bank of Canada announced on Wednesday, October 23, a reduction in the interest rate by 50 basis points, from 4.25% to 3.75%, in line with market expectations. This marks the largest rate cut by the bank since early June of this year.
The Bank of Canada has cut the interest rate by 50 basis points to 3.75%. According to its monetary policy report, the Canadian economy is evolving largely as expected. The growth in the second quarter was somewhat stronger than anticipated, while growth in the third quarter appeared weaker. Energy exports have increased due to the opening of the Trans Mountain Expansion pipeline, although the pace of growth in business investment and government spending has slowed. Overall, the economy still suffers from an excess supply.
However, the labor market remains weak, with the unemployment rate at 6.5% in September. Population growth continues to expand the workforce, while employment growth has been relatively modest, affecting young people and newcomers to Canada. Wage growth remains relatively high compared to productivity growth.
Inflation has slowed down due to the decline in energy prices since the release of this report in July, with consumer price inflation significantly decreasing in September. The upward pressure stemming from housing and other services is gradually easing, although it remains the largest contributor to overall inflation. With inflationary pressures not widely spreading, both businesses' and consumers' inflation expectations have largely returned to normal.
In general, the bank expects GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026. As the economy recovers, the excess supply is gradually being absorbed. The bank anticipates that inflation will remain close to the target throughout the forecast horizon, with upward and downward pressures on inflation balancing out. Based on the return of inflation to the targeted level of 2%, the board has decided to lower the interest rate by 50 basis points to support economic growth. If the economy develops broadly in line with the latest forecasts, we expect further interest rate cuts.
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