The Bank of Canada announced today that it is lowering the target for the overnight rate to 3¼%. The official discount rate is 3½%, and the deposit rate is 3¼%. Likewise, the Bank is continuing its balance sheet normalization policy.
The global economy is evolving in a manner generally consistent with the forecast presented by the Bank in the Monetary Policy Report of October. In the United States, the economy continues to show widespread dynamism, with consumption robust and the job market strong. US inflation remains stable, but some price pressures persist. In the euro zone, recent indicators suggest weaker growth. In China, recently implemented policies, combined with strong exports, are supporting growth, but household spending remains moderate. Global financial conditions have eased and the Canadian dollar has depreciated due to the broad strength of the US dollar.
In Canada, economic growth came in at 1% in the third quarter, slightly below the Bank’s October projection, and is also expected to be more modest than expected in the fourth quarter. Business investment, inventories and exports dragged down gross domestic product (GDP) growth in the third quarter. On the other hand, consumer spending and housing market activity have picked up, suggesting that lower interest rates are starting to boost household spending. Revisions to national accounts data have increased the level of GDP over the past three years, largely due to higher consumption and investment. The unemployment rate rose to 6.8% in November, as employment continued to grow more slowly than the labor force. Wage growth has shown signs of slowing, but remains high relative to productivity growth.
A number of recently announced public policy measures will impact the short-term inflation and growth outlook in Canada. Reductions in immigration target levels suggest that GDP growth next year will be below the Bank’s October forecast. The effects on inflation will likely be less pronounced since lower immigration slows both supply and demand. Other federal and provincial policies – including the temporary suspension of the GST on certain consumer products, one-time payments to individuals and changes to mortgage financing rules – will impact demand and inflation dynamics . The Bank will ignore the temporary effects of these measures and focus on underlying trends to guide its monetary policy decisions.
Additionally, the possibility that the next U.S. administration would impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.
Inflation measured by the consumer price index (CPI) has been around 2% since the summer. It should remain around the target of 2% on average over the next two years. Since October, upward pressures on inflation from housing and downward pressures from property prices have eased, as expected. The GST holiday will reduce inflation temporarily, but this reduction will be reversed when the tax starts to be collected again. Core inflation measures will help us assess the trend in CPI inflation.
Inflation is around 2%, the economy is in oversupply and recent indicators point to weaker growth than expected. In this context, the Governing Council decided to further lower the key rate by 50 basis points to support economic growth and keep inflation near the middle of the 1-3% range. The Governing Council has lowered the policy rate significantly since June. Moving forward, we will evaluate the need for further reductions one decision at a time. Our decisions will be guided by the new information we receive and our assessment of its implications for the inflation outlook. The Bank is committed to maintaining price stability for Canadians by keeping inflation near the 2% target.
Note d’information
The next target date for the overnight rate is January 29, 2025. The Bank will publish its next full projection for the economy and inflation, as well as an analysis of related risks, in the Rapport which will also appear on this date.
