On April 10, 2024, the Bank of Canada announced it was keeping its overnight rate target at 5%, alongside a Bank Rate of 5.25% and a deposit rate of 5%. It also maintained its strategy of reducing money in circulation, for quantitative tightening.
The Bank predicts the global economy will grow around 3%, with inflation in most developed economies gradually decreasing and the US economy outperforming expectations. While US economic growth is expected to slow in the latter part of the year, it will still be stronger than expected in January. The euro area is anticipated to slowly recover from its current sluggish growth. Global oil prices have risen, averaging approximately $5 more than previously estimated in January’s Monetary Policy Report. Despite the rise in bond yields, the overall financial environment has improved as corporate credit spreads have narrowed and equity markets have seen substantial gains since January.
The global GDP growth forecast has increased to 2.75% in 2024 and around 3% in 2025 and 2026. Inflation is slowing across most advanced economies, but is expected to match central bank goals by 2025.
In Canada, economic growth stagnated in the second part of last year, leading to an excess supply in the economy. Various indicators suggest a continued easing of labour market conditions, with employment growing slower than the working-age population and the unemployment rate gradually rising to 6.1% in March. Recent indications show a moderation in wage pressures.
The BOC predicts the economy will grow faster in 2024 due to strong population growth and increased household spending. Residential property investment is growing due to high demand. Government spending has increased, while business investment is expected to slowly improve after a weak second half of 2023. Finally, the BOC forecasts solid growth of exports in 2024.
Overall, the BOC expects the GDP to grow by 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026, with excess supply being gradually absorbed through 2025 and into 2026.
CPI inflation slowed to 2.8% in February, with prices of goods and services easing. However, rent and mortgage interest costs are still high, driving up shelter prices. Core inflation, which was around 3.5%, dropped to just over 3% in February, and trends suggest it may continue to decrease. Inflation is predicted to be near 3% in the first half of 2024, drop below 2.5% in the second half, and reach the 2% target in 2025.
Based on these considerations, the decision was made to hold the policy rate at 5% and continue to monitor economic factors. The BCREA predicts that this rate hold will be the last before three or four rate cuts starting in June, with 25 bps increments and a final targeted 2.5% overnight rate by the end of 2025.
The BOC also released its April 2024 Monetary Policy Report. The next overnight rate target announcement is set for June 5, 2024. The BOC’s next Monetary Policy Report is expected to come out on July 24, 2024.
