The Bank of Canada has announced a reduction in its target for the overnight rate by 25 basis points to 4¾%.

Source: Bank of Canada, CBC

Correspondingly, the Bank Rate is now set at 5%, and the deposit rate is 4¾%. This decision aligns with the Bank’s ongoing balance sheet normalization policy.

Global Economic Context

The global economy grew by approximately 3% in Q1 2024, matching the Bank’s April Monetary Policy Report (MPR) projection. The U.S. economy experienced slower-than-expected growth due to weakened exports and inventories, despite strong but easing private domestic demand. The euro area saw a pickup in activity, while China’s economy strengthened on the back of exports and industrial production, although domestic demand remained weak. Inflation in advanced economies is generally easing, though progress is inconsistent across regions. Oil prices and financial conditions have remained stable since April.

Economic Conditions in Canada

Canada’s economic growth resumed in Q1 2024 after stagnation in the latter half of 2023. The GDP grew by 1.7%, slightly below the MPR forecast, due to weak inventory investment. Consumption grew solidly at around 3%, and business investment and housing activity saw increases. The labor market shows continued hiring, although employment growth is lagging behind the working-age population increase. Wage pressures are gradually moderating. Overall, recent data indicates the economy is operating with excess supply.

Inflation Trends

CPI inflation further declined to 2.7% in April. Core inflation measures also slowed, with three-month trends suggesting ongoing downward momentum. The breadth of price increases across CPI components has reduced and is nearing historical averages, though shelter price inflation remains high.

Monetary Policy Decision

With evidence that underlying inflation is easing, the Governing Council decided to reduce the policy interest rate by 25 basis points. Recent data reinforces confidence that inflation will continue to approach the 2% target. However, risks to the inflation outlook persist. The Governing Council will closely monitor core inflation trends, demand-supply balances, inflation expectations, wage growth, and corporate pricing behavior to ensure price stability for Canadians.

Next Steps

The Bank of Canada will announce its next overnight rate target on July 24, 2024, and release a comprehensive economic and inflation outlook, including risk assessments, in the MPR on the same date.

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