Bank of Canada cuts policy rate by 25 bps

The Bank of Canada (BoC) on Wednesday cut its key interest rate by a quarter percentage point for a second consecutive meeting to 4.5 per cent and further easing ahead as inflation worries wane.

While still above the target of 2 per cent, core inflation, which strips out volatile items, has been declining. The BoC expects inflation to continue to moderate in the coming months.

However, the economy is facing challenges. Growth has slowed, and the labour market is showing signs of weakness. The central bank anticipates economic growth to pick up in the second half of the year, supported by stronger exports and increased consumer spending.

BoC forecasts GDP growth of 1.2 per cent in 2024, 2.1 per cent in 2025, and 2.4 per cent in 2026. “The strengthening economy will gradually absorb excess supply through 2025 and into 2026.”

Despite the rate cut, the BoC remains cautious, emphasising that it will closely monitor economic developments and adjust monetary policy as needed to achieve its inflation target.

“The Bank’s preferred measures of core inflation are expected to slow to about 2½ per cent in the second half of 2024 and ease gradually through 2025. The Bank expects CPI inflation to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. As those effects wear off, CPI inflation may edge up again before settling around the 2 per cent target next year.”

Attribution: The Bank of Canada Statement