The Bank of Canada has reduced its target for the overnight rate to 3.25%, with the Bank Rate at 3.5% and the deposit rate at 3.25%. This move reflects weaker-than-expected economic performance and aims to support growth while maintaining inflation near the 2% target.
Key Takeaways:
Global Overview
The U.S. economy remains robust, while Europe and China show mixed signals.
Eased global financial conditions and a strong U.S. dollar have weakened the Canadian dollar.
Canadian Economy:
Q3 GDP grew by 1%, below projections, with weaker business investment and exports.
Consumer spending and housing activity improved, supported by lower interest rates.
Unemployment rose to 6.8%, and wage growth, though easing, remains high compared to productivity.
Policy Adjustments and Risks:
Lower immigration levels and temporary GST cuts may suppress GDP growth while having mixed effects on inflation.
Uncertainty over potential U.S. tariffs clouds the economic outlook.
Inflation Outlook:
CPI inflation has hovered near 2% since summer. Temporary effects, like the GST holiday, will lower inflation briefly but are expected to normalize thereafter. Core inflation trends will guide future policy adjustments.
The Bank of Canada has lowered its target for the overnight rate to 3.25%, with the Bank Rate at 3.5% and the deposit rate also at 3.25%. This decision comes as the Canadian economy continues to show signs of slower-than-expected growth, prompting action to support economic activity while ensuring inflation remains close to the Bank’s 2% target. The move aligns with the Bank's commitment to fostering price stability and economic recovery amid a changing global and domestic landscape.
Global Overview
The global economy is unfolding largely as anticipated in the Bank’s October Monetary Policy Report. In the United States, economic conditions remain strong, buoyed by solid consumer spending and a resilient labor market. Inflation in the U.S. has stabilized, though some price pressures persist. Meanwhile, growth in the euro area has weakened, reflecting ongoing economic challenges. In China, recent government policy actions and robust export performance have supported growth, but domestic household spending remains subdued. Broad-based strength in the U.S. dollar has led to a depreciation of the Canadian dollar, adding complexity to Canada’s economic outlook.
Canadian Economic Performance
In Canada, the economy grew by 1% in the third quarter, falling short of the Bank's October projections. This softer-than-expected performance was driven by declines in business investment, exports, and inventories. However, consumer spending and housing activity saw a rebound, suggesting that previous interest rate reductions are beginning to have a positive impact on household spending. Historical revisions to national accounts indicate that GDP levels over the past three years were higher than previously reported, primarily due to stronger investment and consumption. Despite these revisions, recent data show that the unemployment rate rose to 6.8% in November, reflecting slower job creation relative to the growth in the labor force. Wage growth, while showing initial signs of easing, remains elevated compared to productivity gains, contributing to ongoing cost pressures.
Policy Adjustments and Risks
Several recently announced federal and provincial policy measures are expected to influence near-term growth and inflation. A reduction in targeted immigration levels is likely to suppress GDP growth next year compared to the Bank's October forecast, though its impact on inflation is expected to be less pronounced. Temporary measures such as a suspension of the GST on select consumer products, one-time payments to individuals, and adjustments to mortgage rules will also shape economic dynamics. The Bank plans to focus on underlying trends and look past temporary effects when making future policy decisions. Additionally, uncertainty surrounding potential new tariffs on Canadian exports to the U.S. adds another layer of risk to the economic outlook, making policy decisions more challenging.
Inflation Outlook
Inflation has remained around 2% since the summer and is expected to stay near this level in the coming years. The upward pressures on inflation from shelter costs and the downward pressures from goods prices have both moderated, aligning with the Bank’s expectations. Temporary measures, like the GST holiday, are likely to lower inflation in the short term, but this effect will reverse once the tax suspension ends. To assess longer-term inflation trends, the Bank will continue to monitor core inflation metrics, which provide a clearer view of the underlying inflationary pressures.
Looking Ahead
With inflation close to target, evidence of economic slack, and recent indicators pointing to slower-than-expected growth, the Governing Council decided to reduce the policy rate by 50 basis points. This brings the total rate reductions since June to a substantial level, emphasizing the Bank’s commitment to supporting growth and ensuring inflation remains within the 1-3% target range. Future rate decisions will depend on evolving economic conditions and incoming data, as the Bank remains focused on maintaining price stability and supporting sustainable growth.
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