Overview
On Wednesday, the Bank of Canada (BoC) reduced its benchmark interest rate for the third consecutive time, aligning with widespread expectations. This decision reflects ongoing easing in broad inflationary pressures. The central bank cut the interest rate by 25 basis points, bringing the policy rate down to 4.25 per cent. Further cuts are anticipated throughout the year.
Economic Background
Economists had generally predicted this rate cut, which marks the third reduction since June and represents an unprecedented sequence of three consecutive cuts since the global financial crisis of 2009. The BoC’s decision is driven by multiple economic indicators showing a slowdown in inflation and softer economic activity.
Inflation and Economic Activity
The BoC highlighted that inflation decelerated to 2.5 per cent in July, with core inflation measures also trending lower. Preliminary data indicates that economic activity remained subdued through June and July, while employment growth has stagnated recently.
Governor Tiff Macklem, in his opening statement, emphasized that if inflation continues to ease as projected in their July forecast, further policy rate reductions are likely. He stated: “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.”
Recent Economic Performance
Despite the rate cuts, the Canadian economy grew by 2.1 per cent in the second quarter of this year, surpassing the central bank’s July forecast slightly. This growth was primarily driven by government spending and business investment.
Macklem described this as a “healthy rebound” from near-zero growth experienced in the latter half of 2023. The BoC’s July forecast anticipates balanced growth for the remainder of this year and a continued easing of inflation.
“We are determined to get inflation down to the two per cent target, and we want it to stay there,” Macklem affirmed. “The economy functions well when inflation is around two per cent.”
Employment Concerns
A significant concern for the BoC remains Canada’s employment situation. The unemployment rate rose to 6.4 per cent in June and stayed there through July, primarily affecting youth and newcomers to Canada.
“Business layoffs remain moderate, but hiring has been weak,” noted Macklem. He added that slack in the labour market is expected to slow wage growth.
Global Economic Context
Globally, economic activity expanded by about 2.25 per cent in the second quarter of 2024. In particular, the United States experienced stronger-than-expected growth led by consumer spending; however, its labour market has shown signs of slowing down.
Future Outlook
Looking ahead, it is widely anticipated that the BoC will further reduce its overnight target rate during its next scheduled meeting on October 23rd if current economic trends persist.
Implications for Housing Affordability
As interest rates trend downward, questions arise regarding their impact on housing affordability. Lower interest rates typically reduce borrowing costs for mortgages, potentially making homeownership more accessible for Canadians.
However, whether these changes will translate into more affordable housing depends on various factors including housing supply constraints and regional market dynamics.
Conclusion
The Bank of Canada’s recent interest rate cut reflects a strategic response to easing inflationary pressures and sluggish economic activity. With potential further reductions on the horizon, these measures aim to stabilize Canada’s economy while addressing underlying concerns such as employment stagnation and wage growth.
Governor Tiff Macklem’s commitment to achieving a stable two per cent inflation target underscores the central bank’s long-term strategy for economic stability. As Canadians anticipate more rate cuts later this year, attention will be focused on how these changes affect broader economic indicators including housing affordability and employment rates.
