Bank of Canada Rate Cut

In a move aimed at supporting economic growth, the Bank of Canada has announced a reduction in its policy rate by 50 basis points, bringing the new target for the overnight rate to 3¼%. This decision also adjusts the Bank Rate to 3¾% and the deposit rate to 3¼%. The Bank continues its policy of balance sheet normalization.

Economic Overview

According to the Bank's October Monetary Policy Report:
– The global economy is progressing largely as anticipated.
– The United States maintains a strong economy with robust consumption and a solid labor market, while inflation rates remain steady.
– The euro area shows signs of weaker growth.
– China benefits from policy actions and strong exports, despite subdued household spending.
– Global financial conditions have relaxed, and the Canadian dollar has weakened against a strong US dollar.

Canadian Economic Growth

Canada's economic growth was reported at 1% for the third quarter, slightly below earlier projections, with underperformance expected in the fourth quarter. Factors contributing to this downturn include:
– Business investment
– Inventories
– Exports

Conversely, consumer spending and housing activity have increased, suggesting that lower interest rates are starting to influence household expenditure. Revisions to the National Accounts indicate an increased GDP level over the past three years, mainly due to higher investment and consumption.

The unemployment rate in Canada has risen to 6.8% in November, with employment growth lagging behind the labor force. While wage growth shows signs of slowing, it remains high compared to productivity.

Policy Measures and Economic Impact

Several policy measures are set to affect near-term growth and inflation:
– Targeted reductions in immigration levels are expected to result in GDP growth falling below the Bank's October forecast for the following year.
– Lower immigration levels tend to dampen both demand and supply, predicted to have less significant impact on inflation.
– Federal and provincial policies, including a temporary suspension of the GST on specific consumer products, one-time payments to individuals, and changes to mortgage rules, will also influence demand and inflation dynamics.

The Bank intends to focus on underlying trends rather than temporary effects when guiding its policy decisions. Additionally, the potential imposition of new tariffs on Canadian exports by the incoming US administration has introduced further uncertainty.

Inflation Insights

The Consumer Price Index (CPI) inflation remains around 2% and is forecasted to stay close to the target over the next couple of years. Both the upward pressure from shelter costs and downward pressure from goods prices have moderated as expected since October. The temporary GST holiday is anticipated to lower inflation temporarily, with effects reversing after it ends. Core inflation measures will be used to assess CPI trends.

Future Outlook

With the economy operating in excess supply and recent indicators showing softer growth than expected, the Governing Council opted to lower the policy rate to help sustain growth and maintain inflation near the midpoint of the 1-3% target range. The policy rate has been significantly reduced since June, and further cuts will be considered based on incoming data and the inflation outlook. The Bank reaffirms its commitment to maintaining price stability by keeping inflation near the 2% target.

The next overnight rate target announcement is scheduled for January 29, 2025, when the Bank will publish its full economic and inflation outlook in the Monetary Policy Report.

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