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The Bank of Canada has announced a reduction in its target for the overnight rate to 4.75%, with the Bank Rate set at 5% and the deposit rate also at 4.75%. This move aligns with the Bank's ongoing policy of balance sheet normalization.
Global Economic Overview
The global economy experienced a growth rate of approximately 3% in the first quarter of 2024, which is consistent with the Bank’s April Monetary Policy Report (MPR) projections. In the United States, economic expansion was slower than anticipated due to weaknesses in exports and inventories. Although private domestic demand remained robust, it showed signs of easing. Conversely, the euro area saw a pickup in economic activity during the same period. China also demonstrated stronger economic performance, driven by exports and industrial production, though domestic demand remained weak. Inflation trends in most advanced economies are easing, albeit unevenly and at different speeds across various regions. Oil prices have remained close to the MPR assumptions, and financial conditions have shown little change since April.
Canadian Economic Performance
In Canada, economic growth resumed in the first quarter of 2024 after a period of stagnation in the latter half of the previous year. The GDP growth rate stood at 1.7%, which was slower than the MPR forecast. A weaker investment in inventories contributed to this slower growth. However, consumption growth was solid at around 3%, with increases in business investment and housing activity. Labour market data indicates that businesses continue to hire, although the employment growth rate has been slower than the growth rate of the working-age population. Wage pressures persist but appear to be gradually moderating. Overall, the recent data suggests that the Canadian economy is still operating with excess supply.
Inflation Trends and Monetary Policy Adjustment
CPI inflation in Canada further eased to 2.7% in April. The Bank’s preferred core inflation measures also slowed, with three-month measures indicating continued downward momentum. Indicators of the breadth of price increases across CPI components have moved closer to their historical average, though shelter price inflation remains high.
Given the continued evidence of easing underlying inflation, the Bank's Governing Council has decided to reduce the policy interest rate by 25 basis points. Recent data has bolstered confidence that inflation will continue to move towards the 2% target. Nevertheless, risks to the inflation outlook persist. The Governing Council is closely monitoring core inflation, the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior. The Bank remains steadfast in its commitment to restoring price stability for Canadians.
