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The Bank of Canada Trims Another 50 Basis Points From Its Policy Rate

Canadian Economics

By: Walter Bolduc

  • The Bank of Canada cut its target for the overnight rate to 3.75 per cent, the Bank rate to 4.0 per cent, and the deposit rate to 3.75 per cent.
  • The global economy is expected to grow by around 3.0 per cent over the next two years. Growth in the U.S. remains strong but is expected to slow, while China’s outlook remains weaker and euro-area growth is expected to recover next year. Inflation in advanced economies is also around central bank targets.
  • The Canadian economy grew around 2.0 per cent in the first half of 2024 and is expected to grow by 1.8 per cent in the second half. The Bank forecasts gradual GDP growth over the forecast horizon supported by lower interest rates. Growth is forecast to be 1.2 per cent in 2024, 2.1 per cent in 2025, and 2.3 per cent in 2026.
  • The economy is in excess supply. Year-over-year CPI inflation has fallen from 2.7 per cent in June to 1.6 per cent in September. The Bank’s preferred core-CPI measures are now below 2.5 per cent and while shelter price inflation remains high it has begun easing.
  • The labour market is soft with the unemployment rate sitting at 6.5 per cent in September. Wage growth in Canada remains high relative to productivity growth but is expected to moderate given the cooler labour market conditions.
  • The Governing Council of the Bank of Canada is committed to restoring price stability and is carefully assessing the opposing forces on inflation. If the economy progresses generally in line with the Bank’s forecast, further rate cuts are expected.

Key Insights

Inflation is coming down faster than expected. CPI growth in September slowed to 1.6 per cent year-over-year, down from 2.0 per cent in August. This level of growth has come much sooner than originally forecast by the Bank of Canada. In the Bank’s July monetary policy report (MPR) they had predicted that CPI growth would reach 2.0 per cent in the second half of next year. If price growth remains subdued persistently, it would free up space for the Bank to more aggressively cut rates in future announcements.

Employment rose in September, but the momentum won’t last. Labour markets have been calm since April, but September’s addition of 47,000 jobs may hint at a reinvigorated labour market. In our view, however, the rise is temporary, and only another 40,000 jobs will be added by the end of the year. Thankfully, the labour market will pick up in 2025 as the impact of lower interest rates filters through the economy. We see the unemployment rate falling from 6.7 per cent in the fourth quarter of 2024 to 6.0 per cent by the middle of next year.

Focus is turning to the south. With the presidential election approaching in the United States, the economic policies of each party are under a microscope. The Republicans, in particular, have suggested a minimum 10 per cent tariff on all American imports. Assuming the suggested tariffs went through, retaliatory tariffs could be imposed on imports from the United States into Canada, reigniting inflationary pressures.

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