What changed in the BOC rate statement from June to July? A lot

The Bank of Canada today reduced its target for the
overnight rate to 4¾%,½%,
with the Bank Rate at 5%4¾%
and the deposit rate at 4¾%.½%.
The Bank is continuing its policy of balance sheet normalization.

The global economy grew by about 3% in the first
quarter of 2024, broadly in line with the Bank’s April Monetary Policy
Report (MPR) projection. In the United States, the economy expanded
more slowly than was expected, as weakness in exports and inventories weighed
on activity. Growth in private domestic demand remained strong but eased. In
the euro area, activity picked up in the first quarter of 2024. China’s economy
was also stronger in the first quarter, buoyed by exports and industrial
production, although domestic demand remained weak. Inflation in most advanced
economies continues to ease, although progress towards price stability is bumpy
and is proceeding at different speeds across regions. Oil prices have averaged
close to the MPR assumptions, and financial conditions are little changed since
April.

In Canada, economic growth resumed in the first
quarter of 2024 after stalling in the second half of last year. At 1.7%,
first-quarter GDP growth was slower than forecast in the MPR. Weaker inventory
investment dampened activity. Consumption growth was solid at about 3%, and
business investment and housing activity also increased. Labour market data
show businesses continue to hire, although employment has been growing at a
slower pace than the working-age population. Wage pressures remain but look to
be moderating gradually. Overall, recent data suggest the economy is still
operating in excess supply.

CPI inflation eased further in April, to 2.7%.The
global economy is expected to continue expanding at an annual rate of about 3%
through 2026. While inflation is still above central bank targets in most
advanced economies, it is forecast to ease gradually. In the United States, the
anticipated economic slowdown is materializing, with consumption growth
moderating. US inflation looks to have resumed its downward path. In the euro
area, growth is picking up following a weak 2023. China’s economy is growing
modestly, with weak domestic demand partially offset by strong exports. Global
financial conditions have eased, with lower bond yields, buoyant equity prices,
and robust corporate debt issuance. The Canadian dollar has been relatively
stable and oil prices are around the levels assumed in April’s Monetary
Policy Report (MPR).

In Canada, economic growth likely picked up to
about 1½% through the first half of this year. However, with robust population
growth of about 3%, the economy’s potential output is still growing faster than
GDP, which means excess supply has increased. Household spending, including
both consumer purchases and housing, has been weak. There are signs of slack in
the labour market. The unemployment rate has risen to 6.4%, with employment
continuing to grow more slowly than the labour force and job seekers taking
longer to find work. Wage growth is showing some signs of moderating, but
remains elevated.

GDP growth is forecast to increase in the second
half of 2024 and through 2025. This reflects stronger exports and a recovery in
household spending and business investment as borrowing costs ease. Residential
investment is expected to grow robustly. With new government limits on
admissions of non-permanent residents, population growth should slow in 2025.

Overall, the Bank forecasts GDP growth of 1.2% in
2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually
absorb excess supply through 2025 and into 2026.

CPI inflation moderated to 2.7% in June after
increasing in May. Broad inflationary pressures are easing. The
Bank’s preferred measures of core inflation also slowed and
three-month measures suggest continued downward momentum. Indicators ofhave
been below 3% for several months and the breadth of price
increases across components of the CPI have moved down
further and are near is now near its
historical norm. Shelter price inflation remains high, driven by rent and
mortgage interest costs, and is still the biggest contributor to total
inflation. Inflation is also elevated in services that are closely affected by
wages, such as restaurants and personal care.

The Bank’s preferred measures of core inflation are
expected to slow to about 2½% in the second half of 2024 and ease gradually
through 2025. The Bank expects CPI inflation to come down below core inflation
in the second half of this year, largely because of base year effects on
gasoline prices. As those effects wear off, CPI inflation may edge up again
before settling around the 2% target next year.

With broad price pressures continuing to ease and
inflation expected to move closer to 2%, Governing Council decided to reduce
the policy interest rate by a further 25 basis points. Ongoing excess supply is
lowering inflationary pressures. At the same time, price pressures in some
important parts of the economy—notably 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 our assessment of their historical
average. However, shelter price inflation remains high.

With continued evidence that underlying inflation
is easing, Governing Council agreed that monetary policy no longer needs to be
as restrictive and reduced the policy interest rate by 25 basis points. Recent
data has increased our confidence that inflation will continue to move towards
the 2% target. Nonetheless, risks to implications for the
inflation outlook remain. Governing Council is closely watching the
evolution of core inflation and remains particularly focused on the balance
between demand and supply in the economy, inflation expectations, wage growth,
and corporate pricing behaviour.. The
Bank remains resolute in its commitment to restoring price stability for
Canadians.

This article was written by Greg Michalowski at www.forexlive.com.