Bank of Canada rate decision: 50 basis point cut, as expected

• Prior overnight rate was 4.25%
• The market was pricing in a 94% chance of a 50 bps cut
• The OIS market was priced at 2.60% for end-2025 ahead of the decision

Highlights of the statement:

• If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further
• The timing and pace of further reductions in the policy rate will be guided by incoming information
• We will take decisions one meeting at a time
• The labour market remains soft
• Population growth has continued to expand the labour force while hiring has been modest
• Growth in the United States is now expected to be stronger than previously forecast while the outlook for China remains subdued
• Growth in the euro area has been soft but should recover modestly next year
• the economy continues to be in excess supply
• BOC forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026

Full text of the statement:

The Bank of Canada today reduced its
target for the overnight rate to 3¾%, with the Bank Rate at 4% and the
deposit rate at 3¾%. The Bank is continuing its policy of balance sheet
normalization.

The Bank continues to expect the global economy to expand at a rate
of about 3% over the next two years. Growth in the United States is now
expected to be stronger than previously forecast while the outlook for
China remains subdued. Growth in the euro area has been soft but should
recover modestly next year. Inflation in advanced economies has declined
in recent months, and is now around central bank targets. Global
financial conditions have eased since July, in part because of market
expectations of lower policy interest rates. Global oil prices are about
$10 lower than assumed in the July Monetary Policy Report (MPR).

In Canada, the economy grew at around 2% in the first half of the
year and we expect growth of 1¾% in the second half. Consumption has
continued to grow but is declining on a per person basis. Exports have
been boosted by the opening of the Trans Mountain Expansion pipeline.
The labour market remains soft—the unemployment rate was at 6.5% in
September. Population growth has continued to expand the labour force
while hiring has been modest. This has particularly affected young
people and newcomers to Canada. Wage growth remains elevated relative to
productivity growth. Overall, the economy continues to be in excess
supply.

GDP growth is forecast to strengthen gradually over the projection
horizon, supported by lower interest rates. This forecast largely
reflects the net effect of a gradual pick up in consumer spending per
person and slower population growth. Residential investment growth is
also projected to rise as strong demand for housing lifts sales and
spending on renovations. Business investment is expected to strengthen
as demand picks up, and exports should remain strong, supported by
robust demand from the United States.

Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025,
and 2.3% in 2026. As the economy strengthens, excess supply is
gradually absorbed.

CPI inflation has declined significantly from 2.7% in June to 1.6% in
September. Inflation in shelter costs remains elevated but has begun to
ease. Excess supply elsewhere in the economy has reduced inflation in
the prices of many goods and services. The drop in global oil prices has
led to lower gasoline prices. These factors have all combined to bring
inflation down. The Bank’s preferred measures of core inflation are now
below 2½%. With inflationary pressures no longer broad-based, business
and consumer inflation expectations have largely normalized.

The Bank expects inflation to remain close to the target over the
projection horizon, with the upward and downward pressures on inflation
roughly balancing out. The upward pressure from shelter and other
services gradually diminishes, and the downward pressure on inflation
recedes as excess supply in the economy is absorbed.

With inflation now back around the 2% target, Governing Council
decided to reduce the policy rate by 50 basis points to support economic
growth and keep inflation close to the middle of the 1% to 3% range. If
the economy evolves broadly in line with our latest forecast, we expect
to reduce the policy rate further. However, the timing and pace of
further reductions in the policy rate will be guided by incoming
information and our assessment of its implications for the inflation
outlook. We will take decisions one meeting at a time. The Bank is
committed to maintaining price stability for Canadians by keeping
inflation close to the 2% target.

This article was written by Adam Button at www.forexlive.com.