Canada’s Central Bank Accelerates Easing, Seeks Growth Amid Slower Inflation
The Bank of Canada has trimmed its benchmark interest rate by half a percentage point, lowering the overnight rate to 3.75%. This move reflects the Bank’s shift toward supporting economic growth as persistently high inflation begins to retreat.
A move this large is unusual and could be interpreted as a sense of urgency to provide relief for the economic engine that has been sputtering lately.
Global economic conditions have shown signs of resilience, but the outlook is uneven. The Bank expects the world economy to expand at a moderate pace of around 3% over the next two years. The United States, Canada’s largest trading partner, is expected to grow more strongly than previously forecasted while China’s recovery lags. Growth in the eurozone has been lacklustre but may rebound in 2024. Crucially, inflation in advanced economies has been softening, approaching the targets set by central banks. A combination of subdued global financial conditions, falling oil prices—down by roughly $10 per barrel since July—and expectations of lower interest rates have tempered inflationary pressures.
In Canada, economic growth has been modest. The economy expanded by about 2% in the first half of the year, and the Bank anticipates growth of 1.75% in the latter half. While consumption remains positive, spending on a per capita basis is waning, and the labour market remains tepid. Unemployment edged up to 6.5% in September as the expanding population outpaced job creation. This has weighed heavily on younger workers and recent immigrants. Although wages have risen, they have outstripped productivity gains, further complicating the country’s economic picture.
Despite these headwinds, the Bank projects a gradual strengthening of economic growth over the coming years, underpinned by lower interest rates. While population growth moderates, consumer spending per capita is expected to pick up, albeit slowly.
The housing market, a key driver of the economy, should experience renewed activity buoyed by robust demand for homes and renovations. Business investment is also set to rise as domestic and international demand remains strong, particularly from the United States.
The Bank forecasts GDP growth of 1.2% in 2024, followed by more robust gains of 2.1% and 2.3% in 2025 and 2026, respectively. As the economy strengthens, excess supply will likely be absorbed, further supporting growth.
On the inflation front, Canada has seen a marked decline. Headline inflation fell from 2.7% in June to 1.6% in September as pressures in key sectors such as shelter began to ease. A cooling in global oil prices has helped bring down fuel costs, while excess capacity in the economy has dampened inflation in other goods and services. The Bank’s core measures of inflation have now dipped below 2.5%, signalling that the broad-based inflationary pressures of the past are waning. Business and consumer expectations for future inflation have also normalized.
The Bank expects inflation to hover close to its 2% target over the next several years, with upward and downward pressures on prices largely offsetting each other. As supply imbalances are gradually resolved, inflationary drivers from shelter costs and other services are projected to fade.
In this context, the Bank’s decision to lower interest rates aims to strike a balance between stimulating economic growth and maintaining price stability. The Bank’s Governing Council has left the door open to further rate cuts, contingent on economic data and inflationary trends. While another rate cut is not guaranteed, the Council has indicated that any future moves will be based on incoming information, reinforcing its commitment to keeping inflation anchored near the 2% mark.
This measured approach reflects a broader confidence that Canada’s inflation challenge has passed its peak, allowing the central Bank to shift focus back to fostering sustainable growth. But as ever, the path forward will depend on balancing monetary easing and inflation management.
