Recent interest rate cuts
The latest rate cut follows a previous reduction from 5 percent to 4.75 percent, which occurred last month. This was the first cut in over four years, reflecting the Bank's response to changing economic conditions. Bank of Canada Governor Tiff Macklem explained that the decision was driven by economic data indicating slack in the labor market, excess supply in the economy, and a continued drop in inflation. Since the Bank began raising rates in March 2022, inflation has decreased significantly from a peak of 8.1 percent in June 2022 to 2.7 percent in June 2024.
Governor Macklem expressed confidence in the measures taken to bring inflation back to target levels, stating, "We are increasingly confident that the ingredients to bring inflation back to target are in place." He also emphasized that future rate cuts would be considered based on ongoing assessments of economic conditions and inflation trends.
Economic impact and predictions
The Bank of Canada's Monetary Policy Report highlights that while inflationary pressures are expected to ease, the progress will be uneven. The central bank's preferred measures of core inflation are now consistently below 3 percent and are projected to slow to about 2.5 percent in the second half of 2024. However, concerns remain regarding high shelter costs, driven by rent and mortgage interest costs, and services closely tied to wages, such as restaurants and personal care.
Macklem noted, "We are carefully assessing the downward pull on inflation from ongoing excess supply, and the pressures from shelter and other services that are holding inflation up." The Bank's next rate decision is scheduled for September 4, where further adjustments may be made based on new economic data.
Economic growth and GDP projections
The Canadian economy, after stalling in the second half of 2023, expanded by approximately 1.75 percent in the first quarter of 2024, driven by strong population growth. The central bank predicts that economic growth will continue to rise in the second half of 2024 as interest rates ease and household and business confidence increase. GDP growth is projected to be around 2.1 percent in 2025 and 2.4 percent in 2026, though these figures are subject to change based on population growth rates and other economic variables.
Inflation outlook
As the GDP grows, the central bank expects core inflation to ease to about 2.5 percent in the latter half of 2024. Additionally, due to a temporary decline in gasoline prices, the consumer price index (CPI) inflation is anticipated to drop below core inflation during the same period. However, the Bank warns that the path to the target inflation rate will be "bumpy" in the short term. CPI inflation is expected to rise slightly in the first half of 2025 before stabilizing at 2 percent in the second half of the year.
The Bank of Canada's recent interest rate cuts signify a proactive approach to managing economic stability and controlling inflation. While the road ahead may be uneven, the central bank's measures aim to support economic growth and ensure long-term financial stability. As the Bank continues to monitor economic indicators, Canadians can expect further adjustments in monetary policy to align with the evolving economic landscape.
source: CTV NEWS
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