Today, the Bank of Canada announced a reduction in its overnight policy interest rate by 0.25% to 4.75%. While this may seem like a small change, it is a positive step for consumer sentiment, especially in an expensive country and province where many of our clients reside. Although we will need more reductions for a significant impact, this move is a good start for many Canadians.
Understanding the Rationale
The decision to lower the rate follows evidence of a slowing inflation rate. Here’s a summary of the Bank’s key observations:
Canadian Inflation
- Inflation measured by the Consumer Price Index (CPI) eased to 2.7% in April.
- The Bank’s preferred measures of core inflation also showed a slowdown, with three-month indicators suggesting continued downward momentum.
- While the breadth of price increases across CPI components has moved down to near historical averages, shelter price inflation remains high.
Canadian Economic Performance and Housing
- Economic growth resumed in Q1 2024, growing at 1.7%, though slower than the Bank had forecast due to weaker inventory investment.
- Consumption growth was solid at around 3%, and business investment and housing activity also saw increases.
- Labour market data indicate continued hiring by Canadian businesses, though employment growth lags behind the growth of the working-age population.
- Wage pressures remain but are gradually moderating.
- Overall, the economy still appears to be operating in excess supply.
Global Economic Performance and Bond Yields
- The global economy grew by about 3% in Q1 2024, aligning with the Bank’s April projections.
- The U.S. economy expanded more slowly than expected, with exports and inventories dragging down activity.
- The euro area saw increased activity in Q1 2024, while China’s economy was bolstered by exports and industrial production, despite weak domestic demand.
- Inflation in advanced economies continues to ease, though progress is uneven across regions.
- Oil prices and financial conditions remain stable since April.
Summary and Outlook
The Bank of Canada cited ongoing evidence of easing underlying inflation as the reason for its decision to adjust the policy rate. The Bank stated that "monetary policy no longer needs to be as restrictive" and expressed increased confidence that inflation will continue to move towards its 2% target.
However, the Bank acknowledged that risks to the inflation outlook remain and that it is closely monitoring core inflation, the balance between demand and supply, inflation expectations, wage growth, and corporate pricing behavior. The Bank reiterated its commitment to restoring price stability for Canadians.
Looking Ahead
The next monetary policy announcement from the Bank of Canada is scheduled for July 24th. We will provide an executive summary immediately following the announcement.
This rate cut, though modest, could boost consumer confidence and signal a potential stabilization or reduction in rates, offering some relief to Canadians navigating the high cost of living.