On September 4, 2024, the Bank of Canada announced a reduction in its policy interest rate by 25 basis points, bringing the target for the overnight rate to 4.25%. This decision marks the third consecutive rate cut since June, as part of the BOC’s ongoing efforts to address inflationary pressures and adjust to economic growth.
In his statement, on September 4th, Governor Tiff Macklem outlined the two key considerations that informed the Bank’s latest policy move. The first is the continued easing of both headline and core inflation, which have trended downwards as anticipated. The second consideration stems from the need to foster economic growth, which is crucial to absorbing excess supply in the economy and ensuring that inflation stabilizes at the Bank’s 2% target over the long term.
The global economic environment has been a mix of slowdowns and recoveries, with notable regional differences. The United States experienced stronger-than-expected growth driven by consumer spending, although its labour market has begun to cool. In the Euro area, tourism and services have bolstered growth, while manufacturing remains weak. China’s economy, on the other hand, continues to struggle with sluggish domestic demand. Overall, global financial conditions have eased since July, with declines in bond yields, while the Canadian dollar has appreciated slightly against a weakening U.S. dollar.
Domestically, Canada’s economy grew by 2.1% in the second quarter of 2024, surpassing the BOC’s July projections. This growth was primarily fueled by government spending and business investment. However, preliminary indicators suggest that economic activity softened in June and July, raising concerns about the robustness of the economy moving forward. The labour market, while stable, has shown signs of slowing, with employment levels remaining relatively unchanged in recent months. Wage growth remains elevated compared to productivity, which poses additional challenges for inflation management.
Inflation in Canada has continued its downward trajectory, reaching 2.5% in July. The BOC’s preferred measures of core inflation also averaged around 2.5%, indicating a general easing of price pressures. However, shelter price inflation remains a significant contributor to overall inflation.
The BOC recognizes that although inflation is generally slowing down across most sectors, there are still specific areas, like housing (shelter costs) and certain services, where prices are rising faster than expected. At the same time, the Canadian economy is producing more goods and services than people are buying, which usually leads to lower prices. These two opposing forces – excess supply pushing prices down and rising costs in housing and services pushing prices up – complicates the BOC’s efforts to bring overall inflation down to its 2% target in a balanced and sustainable way.
The BOC indicated that it is committed to monitoring the evolving economic landscape closely. Governor Macklem emphasized that future monetary policy decisions will be guided by incoming data and their implications for the inflation outlook. While the Bank is prepared to consider further rate cuts if inflation continues to decline as expected, it also remains vigilant against the risk of the economy becoming too weak, which could push inflation below the target range.
