Bank of Canada Cuts Interest Rates: What Are the Implications for the Economy?

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The Bank of Canada today decided to reduce the overnight interest rate target to 3.75 percent, with the Bank Rate at 4 percent and the deposit rate at 3.75 percent. The bank continues its balance sheet normalization policy.


The bank still expects the global economy to grow at a rate of around 3 percent over the next two years. Growth in the United States is now expected to be stronger than previously forecast, while the outlook for China remains bleak.


Growth in the European zone has slowed but is expected to recover modestly next year. Inflation in developed countries has declined in recent months, and is now around the central bank's target. Global financial conditions have eased since July, partly due to market expectations of lower policy interest rates.


In Canada, the economy grew at a rate of around 2 percent in the first half of the year and we expect growth of 1.75 percent in the second half of the year. Usage continues to grow but declines on a per-individual basis.


GDP growth is expected to strengthen gradually over the forecast period, supported by lower interest rates. These forecasts largely reflect the effects of a slower increase in per capita consumer spending and a slower rate of population growth.


Residential investment growth is also expected to pick up as strong demand for housing boosts sales and spending on renovations. Business investment is expected to strengthen as demand increases, and exports are expected to remain strong, supported by robust demand from the United States.


Overall, the Bank forecasts GDP growth of 1.2 percent in 2024, 2.1 percent in 2025, and 2.3 percent in 2026. As the economy strengthens, excess supply will gradually be absorbed.


Consumer Price Index (CPI) inflation has decreased significantly from 2.7 percent in June to 1.6 percent in September. Inflation in the cost of living is still high but has started to moderate. Oversupply in other parts of the economy has reduced inflation in the prices of many goods and services.


The decline in global oil prices has led to lower gasoline prices. These factors have combined to lower inflation. The Bank's preferred core measure of inflation is currently below 2.5 percent. With inflationary pressures no longer widespread, business and consumer inflation expectations have largely returned to normal.


The bank expects inflation to remain close to target over the forecast period, with upward and downward pressure on balanced inflation. Upward pressures from the cost of housing and other services gradually eased, and downward pressures on inflation eased as excess supply in the economy was absorbed.

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