The Bank of Canada has announced a reduction in its target for the overnight rate, bringing it down by 25 basis points to 4.25%. The Bank Rate is now set at 4.5%, and the deposit rate aligns with the new target at 4.25%. This move is part of the Bank’s ongoing efforts to normalize its balance sheet.
Globally, the economy grew by approximately 2.5% in the second quarter, in line with the projections outlined in the Bank’s July Monetary Policy Report (MPR). In the United States, economic growth outpaced expectations, primarily driven by consumer spending, though the labor market is showing signs of cooling. Growth in the Euro area has been supported by strong tourism and service sectors, although manufacturing remains weak. Inflation in both regions is gradually decreasing. In contrast, China’s economic growth has been hindered by sluggish domestic demand. Globally, financial conditions have eased further since July, with bond yields falling. The Canadian dollar has experienced a modest appreciation, mainly due to a weaker US dollar. Additionally, oil prices have decreased, contrary to the assumptions made in the July MPR.
Domestically, Canada’s economy grew by 2.1% in the second quarter, driven primarily by government spending and business investments. This growth was slightly higher than anticipated in July, but preliminary data indicates that economic activity slowed in June and July. The labor market continues to decelerate, with minimal changes in employment over recent months. Despite this, wage growth remains high compared to productivity.
Inflation in Canada further decreased to 2.5% in July, as expected. The Bank’s preferred measures of core inflation averaged around 2.5%, with the proportion of consumer price index components rising above 3% being close to its historical average. High inflation in shelter prices remains the largest contributor to overall inflation, though it is beginning to slow. Some other service sectors continue to see elevated inflation.
In light of the continued easing of broad inflationary pressures, the Governing Council has decided to lower the policy interest rate by another 25 basis points. While excess supply in the economy is exerting downward pressure on inflation, rising prices in shelter and certain services are keeping inflation elevated. The Governing Council is closely monitoring these conflicting inflationary forces. Future monetary policy decisions will be informed by new data and the Bank’s assessment of its implications for the inflation outlook. The Bank of Canada remains committed to restoring and maintaining price stability for Canadians.