This morning, the Bank of Canada announced a decrease in its key interest rate by 0.25%. The prime rate has decreased from 6.95% to 6.70%.
Global economic growth is projected to continue at around 3% annually through 2026. While inflation remains above central bank targets in most advanced economies, it is expected to gradually ease. In the United States, economic growth and inflation is slowing down as consumption growth moderates. Global financial conditions have improved, with lower bond yields, and the Canadian dollar has remained stable and oil prices are in line with April's Monetary Policy Report (MPR) assumptions.
In Canada, economic growth is estimated to have increased to about 1.5% in the first half of 2024. Despite population growth, the economy's potential output is outpacing GDP growth, leading to excess supply. Household spending has been weak, and there are signs of slack in the labour market with a rising unemployment rate of 6.4%. Wage growth is showing signs of easing but remains elevated.
The Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy is expected to absorb excess supply gradually through 2025 and into 2026.
CPI inflation moderated to 2.7% in June, with inflationary pressures easing. Core inflation is expected to slow to around 2.5% in the second half of 2024 and gradually ease through 2025. The Bank expects CPI inflation to drop below core inflation in the second half 2024 before settling around the 2% target next year.
With inflation expected to move closer to 2%, the Governing Council decided to reduce the policy interest rate by 0.25%. Ongoing excess supply is helping to ease inflationary pressures. However, some sectors like shelter remain high due to rent and mortgage interest costs. The Bank will continue to monitor data and assess its impact on the inflation outlook when making future monetary policy decisions.
The next announcement for the overnight rate target is scheduled for September 4, 2024. If you'd like to learn more about this recent announcement or if you have any questions, please feel free to reach out to me and I'd be glad to help!
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