Bank of Canada Reduces Policy Rate by 25 Basis Points to 4½%

The Bank of Canada today reduced its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is continuing its policy of balance sheet normalization.

The global economy is expected to continue expanding at an annual rate of about 3% through 2026. While inflation is still above central bank targets in most advanced economies, it is forecast to ease gradually. In the United States, the anticipated economic slowdown is materializing, with consumption growth moderating. US inflation looks to have resumed its downward path. In the euro area, growth is picking up following a weak 2023. China’s economy is growing modestly, with weak domestic demand partially offset by strong exports. Global financial conditions have eased, with lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar has been relatively stable and oil prices are around the levels assumed in April’s Monetary Policy Report (MPR).

In Canada, economic growth likely picked up to about 1½% through the first half of this year. However, with robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, which means excess supply has increased. Household spending, including both consumer purchases and housing, has been weak. There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderating, but remains elevated.

GDP growth is forecast to increase in the second half of 2024 and through 2025. This reflects stronger exports and a recovery in household spending and business investment as borrowing costs ease. Residential investment is expected to grow robustly. With new government limits on admissions of non-permanent residents, population growth should slow in 2025.

Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.

CPI inflation moderated to 2.7% in June after increasing in May. Broad inflationary pressures are easing. The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm. Shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation. Inflation is also elevated in services that are closely affected by wages, such as restaurants and personal care.

The Bank’s preferred measures of core inflation are expected to slow to about 2½% 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% target next year.

With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.

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Bank of Canada Reduces Policy Rate by 25 Basis Points

The Bank of Canada today (June 5, 2024) reduced its target for the overnight rate to 4¾%, with the Bank Rate at 5% and the deposit rate at 4¾%. The Bank is continuing its policy of balance sheet normalization.

The global economy grew by about 3% in the first quarter of 2024, broadly in line with the Bank’s April Monetary Policy Report (MPR) projection. In the United States, the economy expanded more slowly than was expected, as weakness in exports and inventories weighed on activity. Growth in private domestic demand remained strong but eased. In the euro area, activity picked up in the first quarter of 2024. China’s economy was also stronger in the first quarter, buoyed by exports and industrial production, although domestic demand remained weak. Inflation in most advanced economies continues to ease, although progress towards price stability is bumpy and is proceeding at different speeds across regions. Oil prices have averaged close to the MPR assumptions, and financial conditions are little changed since April.

In Canada, economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. At 1.7%, first-quarter GDP growth was slower than forecast in the MPR. Weaker inventory investment dampened activity. Consumption growth was solid at about 3%, and business investment and housing activity also increased. Labour market data show businesses continue to hire, although employment has been growing at a slower pace than the working-age population. Wage pressures remain but look to be moderating gradually. Overall, recent data suggest the economy is still operating in excess supply.

CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum. Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average. However, shelter price inflation remains high.

With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

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Understanding the Bank of Canada’s Policy Rate and Quantitative Tightening Strategy

The Bank of Canada, the nation’s central financial institution, has maintained its target for the overnight rate at 5% and simultaneously continued its policy of quantitative tightening. This significant decision has far-reaching implications on the nation’s economy and its financial landscape.

The Bank of Canada is the nation’s premiere financial institution that oversees all monetary policies and economic activities. It has regional offices spread across the country, including a head office, and it is known for its rich history and deep roots in the Canadian financial system.

The Bank of Canada is entrusted with several crucial roles, including monetary policy, financial system supervision, currency management, funds management, and retail payments supervision.

One of the bank’s highlighted initiatives is the exploration of a digital form of the Canadian dollar, also known as a central bank digital currency (CBDC). Additionally, the bank is actively taking steps to understand the impacts of climate change on the economy and reducing its environmental footprint.

The Bank of Canada’s policy rate, also known as the overnight rate, is a key interest rate in the financial market. The Bank has decided to maintain this rate at 5%, keeping the Bank Rate and the deposit rate at 5¼% and 5% respectively.

Quantitative tightening is a monetary policy employed by central banks to decrease the amount of liquidity within the economy. The Bank of Canada is continuing this policy, implying a reduction in the amount of money circulating in the economy.

The decision to maintain the policy rate and continue with quantitative tightening is influenced by the global economic scenario. The global economic growth experienced a slowdown in the fourth quarter, with US GDP growth also slowing down but remaining robust and broad-based.

In Europe, the economic growth was flat towards the end of the year after contracting in the third quarter. Despite this, inflation in the United States and the euro area continued to ease.

This global economic situation has led to an increase in bond yields since January while corporate credit spreads have narrowed. Equity markets have also seen a sharp rise, with global oil prices being slightly higher than was assumed in the January Monetary Policy Report (MPR).

The Canadian economy grew more than expected in the fourth quarter, although the pace remained weak and below potential. Real GDP expanded by 1% after contracting 0.5% in the third quarter. A strong increase in exports boosted growth. However, employment continues to grow more slowly than the population, indicating an economy in modest excess supply.

CPI inflation eased to 2.9% in January, as goods price inflation moderated further. Shelter price inflation remains elevated and is the biggest contributor to inflation. The Bank continues to expect inflation to remain close to 3% during the first half of this year before gradually easing.

The Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. The Bank remains resolute in its commitment to restoring price stability for Canadians.

The next scheduled date for announcing the overnight rate target is April 10, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

The Bank of Canada’s decision to maintain its policy rate and continue its quantitative tightening strategy is a pivotal move that will shape the nation’s financial future. By closely monitoring global and domestic economic trends, the Bank is ready to make necessary adjustments to ensure the stability and prosperity of Canada’s economy.

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Bank of Canada Upholds Policy Rate Amid Ongoing Quantitative Tightening

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On January 24, 2024, the Bank of Canada announced its decision to maintain the target rate for the overnight rate at 5% while continuing its quantitative tightening policy.

Global Economic Overview

The global economic landscape is witnessing a gradual slowdown, with inflation rates easing across most economies.

United States

In the United States, economic growth has outperformed expectations, however, predictions suggest a slowdown in 2024 due to a dip in consumer spending and a decrease in business investment.

Euro Area

In the Euro area, the economic climate appears to be in a gentle contraction phase.

China

In China, low consumer confidence coupled with policy uncertainty is expected to limit economic activity.

Oil Prices

Oil prices stand approximately $10 per barrel lower than the assumed figures in the October Monetary Policy Report (MPR).

Financial Conditions

Financial conditions have seen an improvement, effectively counteracting the tightening that took place in the previous fall.

Global GDP Growth Forecast

The Bank has projected the global GDP growth to be 2½% in 2024 and 2¾% in 2025, following the 3% pace in 2023.

Inflation Rates and Central Bank Targets

With the expected softer growth this year, inflation rates in most advanced economies are expected to decrease gradually, hitting central bank targets by 2025.

Canada’s Economic Climate

In Canada, the economy has been stagnant since mid-2023 and the growth is anticipated to remain near zero through the first quarter of 2024.

Consumer Spending and Business Investment

Both consumer spending and business investment have seen a downturn in response to higher prices and interest rates.

Labour Market Conditions

Labour market conditions have lightened, with job vacancies returning to near pre-pandemic levels and new jobs being generated at a slower pace than population growth. However, wage growth is still hovering around 4% to 5%.

Economic Growth Projection

Economic growth is expected to gradually gain momentum around mid-2024.

Household Spending, Exports and Business Investment

By the second half of 2024, it is anticipated that household spending will pick up and exports and business investments will see a boost due to the recovery in foreign demand.

Government Spending

Government spending is set to significantly contribute to growth throughout the year.

GDP Growth Forecast

Overall, the Bank predicts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection.

CPI Inflation

CPI inflation concluded the year at 3.4%. Shelter costs remain the principal contributor to above-target inflation.

Inflation Expectations

The Bank anticipates inflation to stay around 3% during the first half of the year before gradually easing, returning to the 2% target by 2025.

Policy Rate and Balance Sheet Normalization

Given the economic outlook, the Governing Council decided to maintain the policy rate at 5% and to continue the normalization of the Bank’s balance sheet.

Concerns and Commitments

The Council remains concerned about risks to the inflation outlook, especially the persistence in underlying inflation. The Bank stresses its commitment to restoring price stability for Canadians.

Future Announcements

The next scheduled date for announcing the overnight rate target is March 6, 2024. The Bank will publish its next comprehensive outlook for the economy and inflation, including risks to the projection, in the MPR on April 10, 2024.

This article is for informational purposes only and does not constitute financial advice. Always do your own research and consult with a professional before making any financial decisions.

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Bank of Canada Upholds Policy Rate, Continues With Quantitative Tightening Approach

The Bank of Canada has decided to maintain its overnight rate target at 5%, alongside the Bank Rate at 5¼%, and the deposit rate at 5%. The Bank is persevering with its strategy of quantitative tightening in the face of a slowing global economy and further easing inflation.

The worldwide economy is losing momentum, with inflation experiencing a further decline. The United States, however, has showcased stronger growth than anticipated, primarily driven by significant consumer spending. However, predictions suggest a potential weakening in the forthcoming months as previous policy rate increases begin to affect the economy.

In contrast, the Eurozone has registered a weakening growth rate. Combined with declining energy prices, inflationary pressures have been alleviated. In the oil market, prices are approximately $10-per-barrel lower than what was assumed in the October Monetary Policy Report (MPR).

Financial conditions have seen an easing, with long-term interest rates unravelling some of the sharp increases observed earlier in the autumn. The US dollar has depreciated against most currencies, including the Canadian dollar.

In Canada, economic growth stagnated during the middle quarters of 2023. Real GDP saw a contraction rate of 1.1% in the third quarter, following a growth of 1.4% in the second quarter. The rise in interest rates is evidently curbing spending; consumption growth in the last two quarters was nearly zero, with business investment showing signs of volatility but essentially remaining flat over the past year.

The labour market continues to relax; job creation has been slower than labour force growth, job vacancies have further declined, and the unemployment rate has seen a modest rise. Despite these factors, wages are still increasing by 4-5%.

The deceleration in the economy is reducing inflationary pressures across a broad range of goods and services prices. This, coupled with the drop in gasoline prices, contributed to the easing of CPI inflation to 3.1% in October.

Shelter price inflation has seen an uptick, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs.

In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range

Observing further signs that monetary policy is moderating spending and relieving price pressures, the Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council remains concerned about risks to the inflation outlook and is prepared to raise the policy rate further if needed.

The focus of the Governing Council is to see further and sustained easing in core inflation, and it continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank stays steadfast in its commitment to restoring price stability for Canadians.

The next scheduled date for announcing the overnight rate target is January 24, 2023. Along with this, the Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

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