The Bank of Canada cut the overnight rate to 4.50% (from 4.75%), while stating that it will continue with Quantitative Tightening (QT).
The Bank outlined a relatively dovish take on the economy, stating that “…the economy’s potential output is still growing faster than GDP, which means excess supply has increased. Household spending, including both consumer purchases and housing, has been weak. There are signs of lack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work.”
On inflation, the Bank painted a less dovish picture than what was communicated in their June decision. However, it still noted that headline inflation moderated last month, preferred core measures remained below 3%, and that the breadth of price increases in the CPI is near its historical norm.
The accompanying Monetary Policy Report (MPR) showed a downgrade to annual average real GDP growth in 2024 (1.2% vs 1.5%), reflecting a weaker-than-expected first quarter performance. However, growth in 2024Q3 is seen as accelerating to 2.8% annualized. For 2025, the Bank’s GDP growth forecast is relatively unchanged at 2.1%. Despite the dovish overall tone in the statement, we’re still below the Bank in terms of expected GDP growth next year. This reflects our relatively more cautious view around consumption (and housing) that will continue to feel the pinch of elevated rates. In 2026, the Bank now sees growth at 2.4% versus 1.9% in the April MPR.
The Bank upgraded its 2024 forecast for overall inflation (2.4% on a Q4/Q4 basis, versus 2.2% in April). In 2024Q3, inflation is expected at 2.3%. Meanwhile, it’s 2025 and 2026 forecasts were downgraded a touch (2.0% in both years versus forecasts of 2.1%). Meanwhile, core inflation (expressed as the average of the Bank’s preferred measures) is seen at 2.4% this year, before easing to 2% in 2025 and 2026. For the latter two years, inflation is expected to remain well behaved, even with economic growth forecast to exceed potential, as slack built up this year is absorbed.
Key Implications
And just like that, Canadians were treated to a bit more rate relief today. With job market slack rapidly building, the economy in excess supply, inflation expectations continuing to normalize and U.S. policymakers now openly musing about lowing their own policy rate, the Bank of Canada was comfortable enough to trim its policy rate. The BoC doesn’t appear overly concerned about the recent regression in core inflation trends. We should note that even with today’s move, a 4.50% policy rate that’s well north of inflation is still quite restrictive and as such, the economy will still its pressure.
Where do we go from here? In our June outlook, we’d incorporated a year-end target of the 4.25%, with the final cut set to take place in the fourth quarter. While the ultimate destination may remain the same, the dovish lean in today’s Statement raises the risk of more easing by year-end than what we’ve penciled in. All eyes now turn to Governor Macklem’s press conference at 10:30 am.
