Bank of Canada’s interest rate cut

Bank of Canada cuts interest rate to 3.25%

What It Means for Canadians? How the Bank of Canada’s Latest Interest Rate Cut Impacts Growth and Inflation?

The Bank of Canada has announced a reduction in its target for the overnight rate, lowering it to 3.25%. The Bank Rate now stands at 3.5%, and the deposit rate is set at 3.25%. Alongside this, the Bank continues its policy of balance sheet normalization, reaffirming its commitment to fostering economic stability.

Global Economic Landscape

Globally, the economic situation is largely unfolding as anticipated in the October Monetary Policy Report (MPR). Key observations include:

  • United States: The economy remains strong with robust consumer spending and a resilient labor market, though inflation pressures persist in some areas.
  • Euro Area: Growth indicators signal a slowdown.
  • China: Policy measures and strong export activity support growth, but household spending remains muted.
  • Financial Conditions: Global financial markets have eased, while the Canadian dollar has depreciated amidst the strength of the U.S. dollar.

Domestic Economic Highlights

In Canada, economic growth is lagging behind projections. Key trends include:

  • GDP Growth: The economy grew by 1% in Q3, below the Bank’s forecast, with expectations for weaker Q4 growth. Business investment, inventories, and exports dragged on Q3 performance, while consumer spending and housing activity showed improvement due to lower interest rates.
  • Labour Market: The unemployment rate rose to 6.8% in November, reflecting slower employment growth relative to the labor force. Wage growth remains elevated but shows signs of easing.
  • Revised GDP: Historical data revisions indicate higher GDP levels over the past three years due to increased investment and consumption.

Policy Influences on Growth and Inflation

Several policy measures are expected to shape near-term economic growth and inflation:

  1. Immigration Levels: Lower targeted immigration is likely to reduce GDP growth in 2025 but may have limited effects on inflation due to dampened demand and supply.
  2. Consumer and Fiscal Policies: Measures such as a temporary suspension of the GST on certain goods, direct payments to individuals, and adjustments to mortgage rules will influence demand and inflation dynamics.
  3. Trade Uncertainty: Potential U.S. tariffs on Canadian exports add to economic uncertainty, complicating growth forecasts.

Inflation Outlook

Consumer Price Index (CPI) inflation has remained close to the 2% target since summer and is expected to stay within this range over the coming years. Key factors include:

  • Moderating pressures on inflation from shelter and goods prices.
  • Temporary effects from the GST holiday, which will lower inflation in the short term but reverse once the policy ends.
  • Core inflation measures will guide the Bank’s assessment of underlying trends.

Policy Decision and Forward Guidance

The decision to reduce the policy rate by 50 basis points reflects the Governing Council’s goal to support economic growth while maintaining inflation near the mid-point of the 1-3% target range. The rate has been substantially reduced since June, and future adjustments will be considered on a case-by-case basis, informed by new data and trends in the inflation outlook.

The Bank remains steadfast in its commitment to price stability, aiming to keep inflation near the 2% target.

More to Come.

The next interest rate decision will be announced on January 29, 2025, alongside the Bank’s updated economic and inflation outlook in the Monetary Policy Report (MPR).

Sourced By: Bank Of Canada, Press Release

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