On July 24th, the Bank of Canada reduced its target for the overnight rate by 25 basis points to 4.5%. The Bank Rate is at 4.75% and the deposit rate is at 4.5%. The Bank of Canada indicated it is continuing its policy of balance sheet normalization.
Globally, the economy is expected to grow by about 3% annually through 2026. Inflation remains above targets in advanced economies but should gradually decline. In the U.S., economic growth is slowing, consumption is moderating, and inflation is decreasing. The euro area is recovering from a weak 2023, and China’s modest growth is driven by strong exports but weak domestic demand. Global financial conditions have improved, with lower bond yields, rising equity prices, and strong corporate debt issuance. The Canadian dollar is stable, and oil prices match April’s projections.
In Canada, economic growth likely hit 1.5% in the first half of this year. However, with population growth at 3%, potential output is outpacing GDP, increasing excess supply. Household spending, including housing, has been weak. The labour market shows signs of slack, with the unemployment rate rising to 6.4%, slow employment growth, and longer job searches. Wage growth is moderating but remains high.
GDP growth is expected to rise in the second half of 2024 and through 2025, driven by stronger exports and a recovery in household spending and business investment as borrowing costs ease. Residential investment is projected to grow robustly, and population growth should slow in 2025 due to new government limits on non-permanent resident admissions.
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.
CPI inflation moderated to 2.7% in June after increasing in May. Broad inflationary pressures are easing, with the Bank’s preferred measures of core inflation below 3% for several months. Shelter price inflation remains high, driven by rent and mortgage interest costs, and is the largest contributor to overall inflation. Inflation is also elevated in services that are closely tied to wages, such as restaurants and personal care.
The Bank’s preferred measures of core inflation are expected to slow to about 2.5% in the second half of 2024 and ease gradually through 2025. CPI inflation is expected to fall below core inflation in the latter half of this year due to base-year effects on gasoline prices but may rise again before stabilizing around the 2% target next year.
With broad price pressures continuing to ease and inflation expected to move closer to 2%, the Governing Council decided to reduce the policy interest rate by 25 basis points. Excess supply is lowering inflationary pressures, though significant price pressures remain in areas like shelter and certain services.
The monetary policy report (MPR) was also released on July 24th. The monetary policy aims to reduce price pressures in the Canadian economy.
The next scheduled date for announcing the overnight rate target is September 4, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on October 23, 2024.
