Discover how the Bank of Canada reduces policy rate by 50 basis points to 3¾%, aiming to support economic growth and maintain price stability. Learn about the impact on inflation, investment, and the overall Canadian economy
The Bank of Canada has cut its interest rate to 3.75% to help the economy grow and control inflation. This decision comes as both the global and Canadian economies are showing mixed results. In this article, we’ll discuss how this rate cut may affect the Canadian economy, including its impact on prices, growth, and key areas like housing, exports, and business investment.
Bank of Canada Reduces Policy Rate by 50 Basis Points to 3¾%
The Bank of Canada lowered its policy interest rate by 0.50%, setting the target for the overnight rate at 3.75%. The Bank Rate is now 4%, and the deposit rate is also 3.75%. This move reflects the Bank’s continued focus on keeping prices stable while supporting economic recovery amid global changes.
Reasons Behind the Interest Rate Reduction
The Bank lowered the interest rate because inflation is under control, and the Canadian economy needs support. The global economy is expected to grow about 3% in the next two years. Some countries, like the United States, might do better than expected, while others, like China and the Eurozone, will grow slowly.
In Canada, GDP growth is predicted to be 1.2% in 2024, down from 2% earlier in 2023. Since inflation is close to the Bank’s 2% target, the Bank lowered the rate to help the economy without causing more inflation.
Global Economic Conditions Impacting Canada
The global economy has influenced the BoC’s recent decisions. Economic activity around the world has been uneven, with slower growth in advanced economies and inflation easing recently.
U.S. Economic Growth Exceeds Expectations
The U.S. economy, Canada’s largest trading partner, is growing faster than expected. Strong consumer demand and a healthy job market are helping this growth. This is good for Canadian exports, especially in energy, cars, and manufacturing. For example, Canada sells a lot of oil and gas to the U.S., so a strong U.S. economy means more demand for these products. Canadian car makers also benefit from U.S. buyers, which helps create more jobs in Canada.
Eurozone and China Remain Weak Spots
In the Eurozone, economic growth is slow, with factories not producing as much and prices staying high. The Bank of Canada (BoC) expects a small recovery in 2025, which could help improve things.
In China, the recovery is also weak. The country is having problems with its property market, where many builders are struggling, and people are not spending much money. This slower growth in China could affect Canadian exports, especially for raw materials like lumber and minerals, and commodities like oil and gas. If China buys less from Canada, it could hurt Canadian businesses that depend on these exports.
Canadian Economic Outlook
In the first half of 2023, the Canadian economy grew by 2%. However, growth is expected to slow to 1.75% in the second half of the year. The Trans Mountain Expansion pipeline has helped increase energy exports, allowing Canada to sell more oil and gas. But other parts of the economy have too much supply, which means some products are not selling well. This can lead to lower prices and slower growth in those areas.
Consumption and Labor Market Trends
Consumption in Canada has increased, but when you look at it per person, it’s going down because of population growth and rising costs for households. At the same time, the job market is still weak. The unemployment rate was 6.5% in September 2023, with only a little hiring happening, even though the population is growing. Young people and newcomers to Canada are especially feeling the effects of this weak job market.
Wages have been going up but are rising faster than productivity, which could be a problem for the economy in the long run. This situation makes it harder to sell all the extra goods. Despite these challenges, the Bank of Canada (BoC) believes the job market will gradually get better as the economy improves.
Residential Investment and Business Growth
Residential investment has been important for Canada’s GDP growth, and the Bank of Canada (BoC) thinks this area will get better. There is high demand for housing because of lower interest rates and more people moving in. This means home sales and renovation spending will likely increase, helping residential investment grow in 2024 and beyond.
Business investment is also expected to rise as more people want Canadian goods and services. Lower interest rates will make it cheaper for businesses to borrow money and invest in new projects, which should help the economy grow in the next few years.
Inflation Dynamics in Canada
The Bank of Canada has worked hard to lower inflation to its target range. Inflation in Canada dropped from 2.7% in June 2023 to 1.6% in September 2023.
Several things helped this decrease. First, lower global oil prices have made it cheaper for people and businesses. Second, costs for housing, like rent and home prices, have gone down, making it easier for people to afford homes.
Finally, there is less extra supply in different parts of the economy, which means fewer unsold goods. These changes have helped bring inflation down, making it easier for Canadians to manage their money.
Shelter and Energy Costs
One big reason for inflation in recent years has been rising shelter costs, especially in cities. But now, as more homes are available and demand has slowed down, shelter costs are starting to go down.
Energy prices, like gasoline, have also dropped because global oil prices are lower. These changes have helped Canadian consumers and businesses by lowering overall inflation. With lower shelter and energy costs, people can spend their money on other things, which is good for the economy.
Core Inflation and Future Projections
The Bank of Canada’s favorite measures of core inflation, which exclude things like food and energy, are now below 2.5%. This means inflation pressures have eased in most parts of the economy.
The Bank thinks inflation will stay close to its 2% target in the next few years. Rising costs for shelter, like rent and home prices, and services like childcare and healthcare should become less of a problem over time.
Also, the downward pressures on inflation from too much supply are expected to ease as the economy gets stronger. As businesses sell more products and services, it will help balance supply and demand. This means Canadians can expect prices to be more stable in the future.
The Path Forward: What to Expect from the Bank of Canada
The Bank of Canada will decide future interest rates based on new economic data and changes in the economy. They will watch important things like inflation, jobs, and growth.
The recent rate cut is meant to help the economy grow and keep inflation near 2%. This cut makes it cheaper for people and businesses to borrow money, encouraging spending.
In the future, the Bank will carefully use data to decide on interest rates. They want to support growth while keeping inflation low. They will look closely at all the information before making decisions.
Future Interest Rate Reductions Possible
If the economy continues to change as expected, the Bank of Canada thinks it might lower interest rates again in 2024. But when and how much they lower the rates will depend on inflation and other key signs of the economy, like job growth and how much people are spending.
The Bank has said it will make decisions one meeting at a time. This means they will carefully look at each situation before deciding. They want to help the economy without letting inflation go up again.
The next announcement about the overnight rate will be on December 11, 2024. At that time, the Bank will check the latest economic data and decide if they need to change the rates.
Conclusion
The Bank of Canada lowered interest rates to help the economy grow while keeping prices steady. With inflation back within the target range and the economy getting better, the Bank wants to ensure that growth continues and that there isn’t too much extra supply.
Looking ahead to 2024 and beyond, Canadians can expect a positive economic outlook. There should be more growth in housing investments, business expansion, and exports. However, there are still challenges, especially in jobs and the global economy.
The Bank will keep a close eye on these issues and change its policies if needed to help keep the Canadian economy strong over time.
