Bank of Canada reduces key rate to 4.5 percent, indicates more cuts anticipated

July 24, 2024 TruthUSA

OTTAWA—The Bank of Canada cut its interest rates for the second time in 2024, bringing its key rate to 4.5 percent.

The Bank of Canada reduced its 4.75 percent benchmark interest rate by 25 basis points on July 24, noting that core inflation has been below 3 percent for several months.

“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate,” Bank of Canada Governor Tiff Macklem told reporters.

Mr. Macklem said the bank lowered the rate because its monetary policy has been successful in easing high prices, and Canada’s economy now has “more room to grow without creating inflationary pressures.”

The Bank said that Canada’s inflation rate fell to 2.7 percent in June after increasing slightly in May. This was down from 3.4 percent back in December 2023.

Mr. Macklem said that moderating inflation through the rest of 2024 is likely to be “uneven,” as the overall weakness in Canada’s economy is pushing inflation down while price increases in shelter and some services are keeping inflation elevated.

“The push-pull of these opposed forces means the decline in inflation will likely be gradual, and there could be setbacks along the way,” Mr. Macklem said.

“The timing will depend on how we see these opposing forces play out. In other words, we will be taking our monetary decisions one at a time.”

The Bank foresees Canada’s core inflation slowing to around 2.5 percent in the second half of the year and easing gradually throughout 2025.

When it comes to Canada’s GDP, the Bank forecasts that growth will be 1.2 percent in 2024, 2.1 percent in 2025, and 2.4 percent in 2026.

Further Rate Cuts

In response to high inflation numbers following the COVID-19 pandemic, which were exacerbated by the disruption of global supply chains and increased government stimulus, the Bank began raising its interest rates in March 2022.

The Bank’s interest rates rose from 1.5 percent to 5 percent from June 2021 to July 2022. Over that same period, inflation jumped from 3.1 percent to 7.6 percent.

In June 2024, the Bank lowered its interest rate for the first time in more than four years. It claimed its monetary policy did not need to be as “restrictive” thanks to its successful efforts in restoring price stability.

Canada’s economic growth rose to 1.5 percent in the first half of 2024, but with population growth at around 3 percent, the Bank noted the economy’s potential output is still growing faster than its GDP.

The Bank said household spending has been reduced, demand for new vehicles and travel has faded, and many families are setting aside more money for debt payments. It noted that housing prices are keeping inflation elevated.

The Bank said the global economy is expected to continue increasing by around 3 percent through 2026, with inflation easing gradually in most advanced economies. It noted that geopolitical uncertainty remains high, which could potentially impact its inflation outlook.

The Bank will announce its next overnight rate target on Sept. 4, 2024.

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