The Bank of Canada today reduced its target for the overnight rate to 4.25 per cent, with the Bank Rate at 4.25 per cent and the deposit rate at 4.25 per cent. The Bank is continuing its policy of balance sheet normalization.
Global Economic Outlook
The global economy expanded by about 2.5 per cent in the second quarter, consistent with projections in the Bank’s July Monetary Policy Report (MPR). In the United States, economic growth was stronger than expected, led by consumption, but the labour market has slowed. Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft. Inflation in both regions continues to moderate. In China, weak domestic demand weighed on economic growth. Global financial conditions have eased further since July, with declines in bond yields. The Canadian dollar has appreciated modestly, largely reflecting a lower U.S. dollar. Oil prices are lower than assumed in the July MPR.
Canadian Economy
In Canada, the economy grew by 2.1 per cent in the second quarter, led by government spending and business investment. This was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July. The labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.
Inflation
As expected, inflation slowed further to 2.5 per cent in July. The Bank’s preferred measures of core inflation averaged around 2.5 per cent and the share of components of the consumer price index growing above three per cent is roughly at its historical norm. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services.
Interest Rate Decision
With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.
Conclusion
The Bank of Canada’s decision to cut interest rates reflects a cautious approach to monetary policy, balancing the need to support economic growth with the need to control inflation. While the global economy has shown signs of recovery, the Canadian economy continues to face challenges, including a slowing labour market and high shelter price inflation. The Bank will continue to monitor the situation closely and adjust its policy as needed to maintain price stability.
Key Takeaways
- The Bank of Canada cut interest rates by 25 basis points to 4.25 per cent.
- The global economy expanded by about 2.5 per cent in the second quarter, consistent with projections in the Bank’s July MPR.
- Inflation slowed further to 2.5 per cent in July, with high shelter price inflation still a major contributor.
- The labour market continues to slow, with little change in employment in recent months.
- Wage growth remains elevated relative to productivity.
What Does This Mean for Canadians?
The interest rate cut is likely to have a positive impact on the Canadian economy, supporting economic growth and job creation. However, it also means that borrowing costs will remain low, which could lead to higher consumption and potentially higher inflation in the future. The Bank of Canada will continue to monitor the situation closely and adjust its policy as needed to maintain price stability.
What’s Next?
The Bank of Canada will continue to provide regular updates on the state of the economy and the implications for monetary policy. Canadians can stay informed by following the Bank’s website and social media channels.