The Bank of Canada recently made the decision to lower the overnight rate to 4.50% from 4.75%, while also confirming that Quantitative Tightening (QT) will continue. In the statement released by the Bank, a more cautious view on the economy was presented. It was highlighted that the potential output of the economy is growing faster than GDP, indicating an increase in excess supply. Household spending, including consumer purchases and housing, has been weak, and there are signs of a lack in the labor market, with the unemployment rate rising to 6.4%.
On the topic of inflation, the Bank provided a less dovish perspective compared to their previous decision in June. However, it was noted that headline inflation has moderated, preferred core measures remain below 3%, and the breadth of price increases in the Consumer Price Index (CPI) is in line with historical norms.
The Monetary Policy Report (MPR) accompanying the Bank’s decision revealed a downward revision to the annual average real GDP growth forecast for 2024, citing a weaker-than-expected performance in the first quarter. Despite this, growth in the third quarter of 2024 is anticipated to accelerate to 2.8% on an annualized basis. The Bank’s forecast for GDP growth in 2025 remains relatively unchanged at 2.1%. The Bank’s growth forecast for 2026 has been adjusted to 2.4% from 1.9% in the April MPR.
In terms of inflation, the Bank raised its forecast for overall inflation in 2024 to 2.4% on a Q4/Q4 basis, up from 2.2% in April. Inflation for the third quarter of 2024 is expected to be 2.3%. However, the inflation forecasts for 2025 and 2026 were slightly lowered to 2.0%. Core inflation, which represents the average of the Bank’s preferred measures, is projected to be 2.4% this year, decreasing to 2% in 2025 and 2026.
The decision by the Bank of Canada to reduce the policy rate has implications for Canadians, providing some relief. With job market slack increasing, the economy in excess supply, and U.S. policymakers considering lowering their policy rate, the Bank felt comfortable with the rate cut. Despite this adjustment, the policy rate of 4.50% still remains restrictive, and the economy continues to face pressure.
Looking ahead, there is speculation about further easing by the end of the year due to the dovish tone of the recent statement. The target of 4.25% by the end of the year may still be achievable, but there is a possibility of additional cuts. All eyes are now on Governor Macklem’s upcoming press conference for further insights.
It is important to note that the information provided in this report by TD Bank Financial Group is based on sources believed to be reliable, but the accuracy and completeness are not guaranteed. TD Bank Financial Group does not assume any responsibility or liability in providing this information.