Bank of Canada Cuts Interest Rates by 50 Basis Points – Latest Update
The Bank of Canada is set to make its final policy decision of 2024 this Wednesday, with expectations running high for another 50 basis point interest rate cut. This move follows previous cuts of 50 bps in October and a total of 125 bps in cuts since June. The decision comes amidst a backdrop of economic challenges and the need to stimulate growth while keeping inflation in check.
Economic Background and Rationale
Despite Canada’s economic resilience, the Bank of Canada is facing pressure to adjust interest rates as they currently remain higher than necessary to maintain inflation at the 2% target. While some sectors such as home resales and consumer spending on durables have shown signs of improvement in Q3, overall GDP growth is below the Bank’s October forecast for the second half of the year. Additionally, per person GDP declined for the sixth consecutive quarter in Q3.
Unemployment is up by a full percentage point from a year ago, signaling excess supply in labor markets. Excluding the impact of rising mortgage interest costs due to earlier rate hikes, consumer price index growth has been hovering around or below the 2% inflation target throughout 2024. In October, year-over-year CPI growth stood at 1.4%.
Current Interest Rate Scenario
Despite recent cuts, interest rates in Canada remain relatively high compared to the softer economic conditions. The anticipated 50 bps cut would still leave the overnight rate at the upper end of the 2.25% to 3.25% neutral range identified by the central bank. This level is significantly higher than the pre-pandemic peak of 1.75%, indicating a cautious approach to monetary policy adjustments.
Future Outlook and Expectations
Looking ahead, further interest rate reductions may be necessary in the coming year to support economic growth. The ultimate goal is to bring the overnight rate below the Bank of Canada’s estimated neutral range of 2% by mid-2025. These adjustments are aimed at gradually easing economic brakes rather than rapidly accelerating growth.
Week Ahead Data Watch
In addition to the Bank of Canada’s decision, other key economic indicators are on the horizon. U.S. headline inflation is expected to edge up to 2.7% year-over-year, driven by changes in energy and food prices. Core inflation is anticipated to hold steady at 3.3% for the third consecutive month.
Statistics Canada’s advance wholesale indicators suggest a 0.5% increase in core wholesale sales in October, driven by higher sales in motor vehicles and parts. Manufacturing sales are also projected to grow by 1.3% in October, supported by various subsectors including petroleum, coal products, and transportation equipment.
In conclusion, the Bank of Canada’s decision to cut interest rates by 50 basis points reflects ongoing efforts to balance economic growth and inflation targets in a challenging environment. Stay tuned for more updates on the evolving economic landscape.
