Bank of Canada Cuts Key Interest Rate to 3.75% Amid Economic Slowdown
Toronto, ON — The Bank of Canada has announced a significant reduction in its key policy interest rate, lowering the overnight rate by 50 basis points to 3.75%. This move, aimed at stimulating economic growth, comes as inflation eases and the Canadian economy faces excess supply and slow growth.
In its statement, the Bank also lowered the Bank Rate to 4% and the deposit rate to 3.75%. The central bank reaffirmed its ongoing policy of balance sheet normalization as it navigates an evolving global economic landscape.
Global and Domestic Economic Trends
The Bank continues to project global economic growth of 3% over the next two years. Growth in the U.S. is expected to be stronger than previously anticipated, while China’s economic outlook remains subdued. The eurozone is seeing sluggish growth, with hopes for modest recovery in 2025.
In Canada, the economy grew at approximately 2% in the first half of 2024, with growth expected to slow to 1.75% in the second half of the year. Although consumption has continued to rise, it has been declining on a per capita basis. Notably, exports have been buoyed by the opening of the Trans Mountain Expansion pipeline, contributing to stronger trade figures.
The Canadian labour market remains weak, with the unemployment rate at 6.5% in September. Modest hiring activity, coupled with rapid population growth, has led to labour market challenges, particularly for younger Canadians and newcomers. Despite elevated wage growth, productivity gains have lagged, leaving the economy with excess supply.
Future Outlook
Looking ahead, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026. Residential investment is expected to pick up as demand for housing grows, while business investment and exports are set to remain strong, driven largely by U.S. demand. As economic activity strengthens, the Bank anticipates that excess supply will gradually diminish.
On the inflation front, the Consumer Price Index (CPI) fell from 2.7% in June to 1.6% in September. While shelter costs remain high, overall inflation has eased thanks to lower global oil prices and reduced pressure on goods and services prices. The Bank’s preferred core inflation measures are now below 2.5%, with inflation expected to remain near the 2% target in the coming years.
Potential for Further Rate Cuts
The Bank of Canada has indicated that further reductions in the policy rate may be on the horizon, depending on the economy’s performance. “If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further,” the statement noted. However, any future cuts will be guided by incoming data and its implications for the inflation outlook.
The next scheduled announcement regarding the overnight rate target is set for December 11, 2024.
As Canadians continue to navigate a complex economic environment, the Bank remains committed to maintaining price stability and supporting economic recovery.
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