The Bank of Canada has delivered a jumbo interest rate cut, slashing its policy rate by 50 basis points to 3¼%.
This move is expected to provide a much-needed boost to Canada’s economy, which has been facing headwinds in recent months.
Governor Tiff Macklem stated that the central bank opted for two large rate cuts in a row because economic growth no longer needs to be restricted.
Global Economic Outlook Remains Uncertain
The global economy continues to evolve largely as expected, with the United States showing broad-based strength and the euro area experiencing weaker growth.
In China, recent policy actions and strong exports are supporting growth, but household spending remains subdued. Global financial conditions have eased, and the Canadian dollar has depreciated in the face of broad-based strength in the US dollar.
Canada’s Economic Growth Slows Down
Canada’s economy grew by 1% in the third quarter, falling short of the Bank’s October projection. The fourth quarter also looks weaker than projected, with business investment, inventories, and exports pulling down GDP growth.
However, consumer spending and housing activity have picked up, suggesting that lower interest rates are beginning to boost household spending.
Impact of Policy Measures on Economic Outlook
A number of policy measures have been announced, which will affect the outlook for near-term growth and inflation in Canada.
Reductions in targeted immigration levels are expected to result in lower GDP growth next year, while the effects on inflation are likely to be more muted.
Other federal and provincial policies, including a temporary suspension of the GST on some consumer products and changes to mortgage rules, will also impact demand and inflation.
Inflation Remains Steady, But Uncertainty Looms
CPI inflation has remained steady at around 2% since the summer and is expected to average close to the 2% target over the next couple of years.
However, the possibility of new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.
Bank of Canada’s Commitment to Price Stability
With inflation around 2%, the economy in excess supply, and recent indicators tilted towards softer growth than projected, the Governing Council decided to reduce the policy rate to support growth and keep inflation close to the middle of the 1-3% target range.
The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.
What’s Next for the Bank of Canada?
The next scheduled date for announcing the overnight rate target is January 29, 2025. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the Monetary Policy Report (MPR) at the same time.
