Bank of Canada Reduces Policy Rate by 25 Basis Points to 4.25%

On Wednesday, the Bank of Canada reduced its target for the overnight rate to 4.25%, with the Bank Rate at 4.5% and the deposit rate at 4.25%. The Bank is continuing its policy of balance sheet normalization.

The Bank of Canada noted that the global economy expanded by about 2.5% in Q2, consistent with projections in the Bank’s July Monetary Policy Report (MPR). In the US, economic growth was stronger than expected, led by consumption, but the labor market has slowed. Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft. Inflation in both regions continues to moderate. In China, weak domestic demand weighed on economic growth. Global financial conditions have eased further since July, with declines in bond yields. The Canadian dollar has appreciated modestly, largely reflecting a lower US dollar. Oil prices are lower than assumed in the July MPR.

In Canada, the economy grew by 2.1% in Q2, led by government spending and business investment. This was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July. The labor market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.

As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2.5%, and the share of components of the consumer price index growing above 3% is roughly at its historical norm. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services.

With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and the Council’s assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.