Further reductions will be guided by incoming information assessment of inflation outlook

The Bank of Canada has reduced its policy rate to 3¾%, representing a cut of 50 basis points, as it continues its policy of balance sheet normalization.

With inflation now back around the 2% target, the Bank of Canada’s Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1% to 3% range. If the economy evolves broadly in line with its latest forecast, the Governing Council expects to reduce the policy rate even further. 

However, 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. As such, the Governing Council reports that it will take decisions one meeting at a time whilst committing to maintaining price stability for Canadians by keeping inflation close to the 2% target.

Core inflation now below 2½% 

The Canadian Bank’s preferred measures of core inflation are now below 2½% with inflationary pressures no longer broad-based, business and consumer inflation expectations have largely normalized. The bank expects inflation to remain close to the target over the projection horizon, with the upward and downward pressures on inflation roughly balancing out. 

The upward pressure from shelter and other services gradually diminishes, and the downward pressure on inflation recedes as excess supply in the economy is absorbed. CPI inflation has declined significantly from 2.7% in June to 1.6% in September. 

Inflation in shelter costs remains elevated but has begun to ease while excess supply elsewhere in the economy has reduced inflation in the prices of many goods and services. The drop in global oil prices has led to lower gasoline prices. These factors have all combined to bring inflation down. The next scheduled date for announcing the overnight rate target is December 11, 2024. 

Performance of Canadian economy

In Canada, the economy grew at around 2% in the first half of the year and we expect growth of 1¾% in the second half. Consumption has continued to grow but is declining on a per-person basis. Exports have been boosted by the opening of the Trans Mountain Expansion pipeline. 

The labour market remains soft—the unemployment rate was at 6.5% in September. Population growth has continued to expand the labour force while hiring has been modest. This has particularly affected young people and newcomers to Canada. 

Wage growth remains elevated relative to productivity growth. Overall, the economy continues to be in excess supply. GDP growth is forecast to strengthen gradually over the projection horizon, supported by lower interest rates. This forecast largely reflects the net effect of a gradual pick-up in consumer spending per person and slower population growth.

Residential investment growth is also projected to rise as strong demand for housing lifts sales and spending on renovations. Business investment is expected to strengthen as demand picks up, and exports should remain strong, supported by robust demand from the United States.

Global perspective

Overall, the bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026. As the economy strengthens, excess supply is gradually absorbed.

The bank continues to expect the global economy to expand at a rate of about 3% over the next two years noting that growth in the United States is now expected to be stronger than previously forecast while the outlook for China remains subdued. 

Growth in the Euro Area has been soft but should recover modestly next year. Inflation in advanced economies has declined in recent months, and is now around central bank targets. Global financial conditions have eased since July, in part because of market expectations of lower policy interest rates.