The Bank of Canada has announced a reduction in its policy interest rate by 50 basis points, marking the fourth consecutive decrease since June. This adjustment brings the policy rate to 3.75%. The decision aims to maintain inflation close to the 2% target, which it has recently achieved.
Senior Deputy Governor Carolyn Rogers joined in discussing this recent policy change and the latest Monetary Policy Report. "We took a bigger step because inflation is now back to the 2% target, and we want to keep it close to the target," they stated.
In September, headline inflation was recorded at 1.6%, with core inflation measures under 2½%. According to surveys conducted by the Bank, expectations for business and consumer inflation have also decreased significantly, indicating a return to low inflation levels.
Despite some economic activity increase this year, it remains soft, contributing to reducing inflationary pressures. With inflation stabilizing at around 2%, the Bank hopes that last week's interest rate cut will stimulate demand and economic growth.
Looking forward, an economic strengthening is expected gradually in 2025 and 2026 due to lower interest rates. While population growth may slow down, consumer spending per capita is anticipated to rise. Additionally, residential investment should see growth driven by strong housing demand. Business investment is predicted to improve alongside increasing demand, with exports remaining robust due in part to U.S. market demands.
The forecast suggests that inflation will remain near its target over the projection period. Any upward pressure from shelter and other services should lessen over time while stronger demand reduces downward pressure on prices.
However, risks exist regarding this outlook. A potential delay in household spending or business investment could pose downside risks for inflation recovery. Conversely, lower interest rates might trigger a more significant rebound in housing activities or sustained high wage growth relative to productivity levels. Geopolitical uncertainties and possible new shocks also contribute as factors influencing these forecasts.
"If the economy evolves broadly in line with our forecast," further reductions in policy rates are anticipated "to support demand and keep inflation on target." The timing of such cuts will depend on ongoing data assessments related specifically towards impacts upon future price stability projections.
Governor Tiff Macklem emphasized: "High inflation and interest rates have been a heavy burden for Canadians...With that summary," he concluded alongside Deputy Governor Rogers expressing readiness “to take your questions.”