On Wednesday, October 23, the Bank of Canada announced a 50-basis-point interest rate cut, from 4.25% to 3.75%, in line with market expectations. This marks the largest rate cut by the bank since early June of this year.
According to its monetary policy report, the Canadian economy is evolving largely as expected. Compared to the July forecast, growth in the second quarter was somewhat stronger than anticipated, while growth in the third quarter appeared weaker. Energy exports increased thanks to the opening of the Trans Mountain Expansion pipeline, while the pace of business investment and government spending growth slowed. Overall, the economy continues to experience excess supply.
However, the labor market remains weak, with the unemployment rate reaching 6.5% in September. Population growth has continued to expand the labor force, while employment growth has been relatively modest. This has affected young people and newcomers to Canada. Wage growth remains relatively high compared to productivity growth.
Inflation has slowed due to declining energy prices since the release of this report in July. Consumer price inflation dropped significantly in September. The upward pressure from shelter and other services is gradually easing, although it remains the largest contributor to overall inflation. With inflationary pressures not spreading broadly, inflation expectations among businesses and consumers have largely returned to normal.
Overall, the bank expects GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026. As the economy recovers, excess supply is gradually being absorbed. The bank expects inflation to remain close to its target over the forecast horizon, with upward and downward inflationary pressures balancing out. Based on inflation now returning to the 2% target, the board has decided to cut the interest rate by 50 basis points to support economic growth. If the economy continues to develop broadly in line with the latest forecasts, further interest rate cuts are expected.
