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Bank of Canada Reduces Policy Rate by 25 Basis Points

Exciting news! The Bank of Canada has just announced a 25 basis point reduction in its policy interest rate, marking the first rate cut in four years. This decision lowers the prime rate to 6.95% and the policy rate to 4.75%.

Global Economic Overview

The global economy saw a growth of approximately 3% in the first quarter of 2024, aligning with the Bank’s April Monetary Policy Report (MPR) projections.

  • United States: The economy expanded more slowly than expected, hindered by weak exports and inventories, although private domestic demand remained robust but eased.
  • Euro Area: Economic activity picked up during the first quarter.
  • China: The economy showed strength, driven by exports and industrial production, despite weak domestic demand.
  • Inflation Trends: Inflation continues to ease in most advanced economies, albeit with varied progress. Oil prices have remained stable, and financial conditions are largely unchanged since April.

Canadian Economic Insights

Canada’s economy resumed growth in the first quarter of 2024 after stagnating in the latter half of last year. Key insights include:

  • GDP Growth: Recorded at 1.7% in the first quarter, slower than forecasted in the MPR.
  • Consumption Growth: Solid at about 3%, with increases in business investment and housing activity.
  • Labour Market: Businesses continue to hire, though employment growth is slower than the working-age population.
  • Wage Pressures: Gradually moderating.
  • Shelter Inflation: Remains high.

Inflation and Monetary Policy

CPI inflation eased further to 2.7% in April. The Bank’s preferred measures of core inflation also showed a slowdown, with three-month measures indicating continued downward momentum. Indicators of the breadth of price increases across CPI components have decreased further and are near their historical average. However, shelter price inflation remains high.

With clear evidence that underlying inflation is easing, the Governing Council has decided that monetary policy no longer needs to be as restrictive, leading to the policy interest rate being reduced by 25 basis points. Recent data has bolstered confidence that inflation will continue to move towards the 2% target. Nonetheless, the Governing Council remains vigilant regarding the inflation outlook, focusing on the balance between demand and supply, inflation expectations, wage growth, and corporate pricing behavior. The Bank remains steadfast in its commitment to restoring price stability for Canadians.

Next Steps

The next scheduled announcement for the overnight rate target is on July 24, 2024. The Bank will also publish its next full outlook for the economy and inflation, including risks to the projection, in the Monetary Policy Report at that time.

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