The Bank of Canada reduced its key interest rate by 0.5 percentage points, lowering its overnight rate to 4.5%.
It is the second consecutive rate cut by Canada’s central bank.
“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,” announced the Bank of Canada in a release on Wednesday.
The bank rate was also reduced to 4.75% and the deposit rate to 4.5%.
The central bank is continuing its policy of balance sheet normalization.
“The Canadian dollar has been relatively stable and oil prices are around the levels assumed in April’s Monetary Policy Report,” reads the release.
According to the Bank of Canada, the global economy is expected to keep expanding at a rate of around 3% through 2026.
Inflation has eased gradually in the U.S. and its economic slowdown is beginning to materialize, moderated by consumption growth.
Economic growth is continuing to gain momentum in Europe compared to last year.
While China’s economy is experiencing modest growth due to strong exports, it remains weak domestically.
The Bank of Canada said that global financial conditions have eased recently, resulting in lower bond yields and optimistic equity prices.
“In Canada, economic growth likely picked up to about 1.5% 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,” reported the central bank.
Canada’s economy has seen a drop in household spending, including in both consumer purchases and housing as of late, as well as indications that the labour market is slacking.
“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.” it said.
The Bank of Canada is predicting a growth in GDP by the end of the year and through 2025 as a result of stronger exports and a recovery in household spending.
Additionally, borrowing costs have eased and business investments increased.
The central bank is also forecasting a robust growth in residential investment due to new government restrictions on admissions of non-permanent residents, which should result in a decline in population growth next year.
“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,” reads the release.
Consumer Price Index inflation lessened to 2.7% in June after increasing in May, now returning to its historical norm and the bank’s “preferred measures of core inflation have been below 3% for several months.”
However, shelter price inflation remains high as rent and mortgage interest costs continue to rise, acting as the biggest contributor to total inflation.
Inflation increased in the service sector as a result of increased wages, affecting areas like personal care and restaurants.
“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,” reads the release. “As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year.”
The central bank said that ongoing excess supply is lowering inflationary pressures but that shelter and service costs continue to hold up inflation.
The Bank of Canada will announce its next overnight rate target in September and will publish its full outlook on the economy and inflation in October’s Monetary Policy Report.
