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The Bank of Canada Cuts Rates Again in July

Canadian Economics

By: Walter Bolduc

    

  • The Bank of Canada cut its target for the overnight rate to 4.5 per cent, with the Bank rate to 4.75 per cent, and the deposit rate to 4.5 per cent.
  • The global economy is expected to grow by 3.0 per cent annually through 2026. The United States’ economy is slowing, and U.S. inflation looks to be trending down. China’s economic growth is modest while growth in Europe is picking up.
  • Canada’s economic growth is estimated at about 1.5 per cent (annualized) in the first half of 2024. GDP growth is forecasted to increase in the second half of 2024. The Bank forecasts GDP growth of 1.2 per cent in 2024, 2.1 per cent in 2025, and 2.4 per cent in 2026.
  • Excess supply has increased as population growth causes potential output to grow faster than GDP. The labour market is cooling with the unemployment rate up to 6.4 per cent in June, while wage growth is showing signs of moderating.
  • CPI inflation eased to 2.7 per cent in June (year-over-year). Shelter prices remain the largest issue for inflation.
  • The Bank’s preferred measures of core inflation are expected to slow to about 2.5 per cent in the second half of 2024, and gradually ease through 2025.
  • The Bank expects CPI inflation to settle around its 2 per cent target next year. Excess supply is pushing inflation down while price pressures in shelter and services are holding inflation up. The Governing Council of the Bank of Canada is committed to restoring price stability and is carefully assessing the opposing forces on inflation.

Key insights

Labour market and inflation data are promising for the Bank’s efforts to restore price stability. June’s inflation data indicated cooling. Inflation rose 2.7 per cent year-over-year—0.2 percentage points lower than in May—due in part to the deceleration of goods prices and slower gasoline price growth. Importantly, shelter prices saw a small deceleration to 6.2 per cent. Labour market data also indicated cooling with the unemployment rate up 0.2 percentage points to 6.4 per cent and total hours worked down 0.4 per cent in June. While average hourly wages were up 0.3 percentage points to 5.4 per cent year-over-year in June, we expect wage growth to slow over the coming months as inflation cools.

Although cuts will be welcomed, their full effect on household finances will take time. Shelter costs are currently the largest strain on consumers’ finances and the largest upward contributor to inflation. In June, mortgage interest costs were up 22.3 per cent compared to a year earlier, and rented accommodation was up 8.5 per cent. Even with the rate cuts, mortgage rates are much higher than they were a few years ago. With many households nearing mortgage renewal, the higher rates will continue to loom over inflation and household finances.

The Bank of Canada will be looking at the economic situation in the United States. Easing price pressures and signs of a weakening labour market in the U.S. look to be creating a favourable environment for the Fed to cut rates in September. The Bank of Canada is keeping this in mind with regards to its own rate cuts. To help maintain the relative strength of the Canadian dollar, the Bank of Canada wants to make sure that it doesn’t create too large of a spread between the United States’ interest rates and its own. The favourable conditions for a Fed cut have likely given the Bank of Canada confidence that it can go forward with another cut today.

For a better understand of Canada’s economic outlook please visit our 5-year Canadian outlooks.

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