The Bank of Canada Lowers Its Policy Rate by 50 Basis Points
On Wednesday, October 23, The Bank of Canada reduced its target for the overnight lending rate from 4.25% to 3.75%. The cut was widely expected by financial markets, marking the Bank’s fourth rate reduction since the onset of the pandemic and the biggest reduction in Canada’s key lending rate since March 2020.
Canada’s inflation rate was 1.6% in September, the slowest year-over-year increase in more than three years and below the Bank’s target of 2%. The Bank expects inflation to remain within the target range over the near term, with the upward and downward pressures on inflation roughly balancing out.
The Canadian economy grew by about 2% in the first half of 2024 and growth is expected to slow to about 1.75% for the second half, according to the Bank of Canada. GDP growth is forecast to accelerate slightly next year, aided by lower interest rates. The Bank also noted that the employment market remains soft. While strong population growth continues to expand the labour force, hiring intentions remain modest, with the unemployment rate coming in at 6.5% in September.
In its Monetary Policy Report, the Bank mentioned that shelter inflation is starting to ease, with shelter inflation slowing to 5.8% in September 2024, down from its recent high of 7.2% in March 2024. The Bank also expects residential investment growth to pick up as strong demand for housing boosts home sales and spending on renovations. The Bank also expects recent changes to government mortgage insurance rules to bolster housing demand in 2025 and 2026.
While lower interest rates may help increase the supply of new housing by easing financing costs, the Bank stated that “constraints on land supply, zoning restrictions, and a lack of skilled labour are expected to limit the pace of new construction. As a result, growth in housing demand is expected to outpace increases in supply.” Due to these factors the Bank projects that the housing market will remain tight.
The Bank of Canada will make its next scheduled interest rate announcement on Wednesday, December 11, and will publish its full outlook for the economy and inflation in its next Monetary Policy Report on Wednesday, January 29, 2025.
