The Bank of Canada slashed its target for the overnight rate to 4.5%, aligning the Bank Rate at 4.75% and the deposit rate at 4.5%. The Bank persists in its balance sheet normalization policy.
Global economic growth is projected to sustain an annual rate of about 3% through 2026. Despite inflation surpassing central bank targets in most advanced economies, it's anticipated to gradually decline. In the U.S., the expected economic slowdown is materializing with moderated consumption growth. U.S. inflation seems to be resuming its downward trend. The euro area is witnessing growth following a weak 2023. China's economy is growing modestly, with subdued domestic demand offset by strong exports. Globally, financial conditions have relaxed, featuring lower bond yields, buoyant equity markets, and robust corporate debt issuance. The Canadian dollar remains relatively stable, with oil prices around the levels anticipated in April’s Monetary Policy Report (MPR).
In Canada, economic growth likely climbed to about 1.5% through the year's first half. However, with robust population growth of about 3%, the economy's potential output is growing faster than GDP, indicating increased excess supply. Household spending, encompassing consumer purchases and housing, remains weak. Signs of slack are emerging in the labor market. The unemployment rate has climbed to 6.4%, with employment growing more slowly than the labor force, causing job seekers to take longer to find work. Wage growth is showing moderation signs but remains elevated.
GDP growth is forecasted to rise in the latter half of 2024 and throughout 2025, driven by stronger exports and a rebound in household spending and business investment as borrowing costs ease. Residential investment is expected to grow robustly. With new government limits on admissions of non-permanent residents, population growth should slow in 2025.
Overall, the Bank projects 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 into 2026.
CPI inflation moderated to 2.7% in June after a May increase. Broad inflationary pressures are easing. The Bank's preferred measures of core inflation have been below 3% for several months, with the breadth of price increases across CPI components now near its historical norm. Shelter price inflation remains high, driven by rent and mortgage interest costs, continuing as the largest contributor to total inflation. Inflation also remains high in services closely tied to wages, like restaurants and personal care.
The Bank’s preferred measures of core inflation are expected to slow to about 2.5% in the latter half of 2024 and ease gradually through 2025. The Bank anticipates CPI inflation to dip below core inflation in the second half of this year, largely due to base year effects on gasoline prices. As these effects dissipate, CPI inflation may edge up again before stabilizing around the 2% target next year.
With broad price pressures easing and inflation moving closer to 2%, the Governing Council decided to lower the policy interest rate by another 25 basis points. Ongoing excess supply is reducing inflationary pressures. Simultaneously, price pressures in key sectors—notably shelter and some other services—are keeping inflation elevated. The Governing Council is carefully weighing these opposing forces on inflation. Future monetary policy decisions will be informed by incoming data and their implications for the inflation outlook. The Bank remains committed to restoring price stability for Canadians.
Information Note
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.