The Bank of Canada today announced a reduction in its target for the overnight rate to 4¾%, with the Bank Rate at 5% and the deposit rate at 4¾%. This decision is part of the Bank’s ongoing policy of balance sheet normalization.
Global Economic Context
The global economy grew by about 3% in the first quarter of 2024, aligning closely with the Bank’s April Monetary Policy Report (MPR) projection. In the United States, economic expansion was slower than expected due to weak exports and inventories. Although growth in private domestic demand remained robust, it showed signs of easing. Meanwhile, in the euro area, economic activity picked up during the first quarter. In China, the economy strengthened, driven by exports and industrial production, despite weak domestic demand. Inflation in most advanced economies continues to ease, but progress toward price stability is uneven and varies across regions. Oil prices have remained close to the MPR assumptions, and financial conditions have seen little change since April.
Canadian Economic Performance
In Canada, economic growth resumed in the first quarter of 2024 after stalling in the second half of the previous year. First-quarter GDP growth was 1.7%, slower than the MPR forecast, primarily due to weaker inventory investment. Nevertheless, consumption growth was solid at about 3%, with increases in business investment and housing activity. Labor market data indicate that businesses are continuing to hire, although employment growth is lagging behind the growth of the working-age population. Wage pressures persist but appear to be gradually moderating. Overall, recent data suggest that the economy is still operating with excess supply.
Inflation Trends
CPI inflation eased further in April to 2.7%. The Bank’s preferred measures of core inflation also slowed, with three-month measures indicating continued downward momentum. Indicators of price increases across CPI components have moved closer to their historical averages, although shelter price inflation remains high.
Policy Decision
Given the continued evidence that underlying inflation is easing, the Governing Council decided that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data have bolstered confidence that inflation will continue to move towards the 2% target. However, risks to the inflation outlook persist. The Governing Council is closely monitoring the evolution of core inflation, the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior. The Bank remains committed to restoring price stability for Canadians.
Next Announcement
The next scheduled date for announcing the overnight rate target is July 24, 2024. Concurrently, the Bank of Canada will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR.
Written by Jared Gibbons – Top 1% Realtor in the Fraser Valley