Bank of Canada cuts policy rate by 50bps as inflation back around 2% target

Bank of Canada’s Governing Council decided on Wednesday to reduce the policy rate by 50 basis points as inflation now back around the 2 per cent target.

The council said the cut decision is to support economic growth and keep inflation close to the middle of the 1-3 per cent range.

The Bank of Canada reduced its target for the overnight rate to 3¾ per cent, with the Bank Rate at 4 per cent and the deposit rate at 3¾ per cent. The central bank said it is “continuing its policy of balance sheet normalisation.”

Forecasts

Canada’s GDP growth is forecast to “strengthen gradually over the projection horizon, supported by lower interest rates.”

Bank of Canada forecasts GDP growth of 1.2 per cent in 2024, 2.1 per cent in 2025, and 2.3 per cent in 2026. “As the economy strengthens, excess supply is gradually absorbed.”

This forecast, the central bank said, largely reflects the net effect of a gradual pick-up in consumer spending per person and slower population growth.

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

Canada’s consumer price index (CPI) inflation rate experienced a significant decrease from 2.7% in June to 1.6% in September. While shelter costs remain elevated, they have begun to moderate. Excess supply in other sectors of the economy has contributed to lower prices for many goods and services. The decline in global oil prices has also led to decreased gasoline prices. These combined factors have resulted in an overall decline in inflation.

The Bank of Canada’s preferred measures of core inflation are now below 2.5 per cent. As inflationary pressures have eased, both businesses and consumers have normalized their inflation expectations.

The central 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, it added.

“With inflation now back around the 2% target, 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 our latest forecast, we expect to reduce the policy rate 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.”

Attribution: Bank of Canada