Spurred on by weakening underlying trends in the Canadian economy, the Bank of Canada cut its overnight policy interest rate by 0.25% to 4.25%. This is the third reduction we’ve seen this year and while all cuts have been modest, they are moving Canada towards more normalized interest rates.
We’ve summarized the Bank’s rationale for this decision below, including its forward-looking comments for signs of what may happen next over the next few months and into 2025.
Canadian Inflation:As expected, inflation slowed further to 2.5% in July with the Bank’s preferred measures of core inflation averaging around 2.5% as well.High shelter price (housing) inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services included in the inflation calculation.
Economic Performance & OutlookIn Canada, the economy grew by 2.1% in the second quarter – led by government spending and business investment – and this rate was “slightly stronger” than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July.The Canadian labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.The global economy expanded by about 2.50% in the second quarter, consistent with projections in the Bank’s July Monetary Policy Report.In the United States, economic growth was stronger than expected, led by consumption, but the labour market has slowed.
Summary Comments & Outlook
The Bank noted that 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. As a result, the Bank is “carefully assessing” these opposing forces on inflation.
Economists are predicting 1-2 more cuts this year and more to come in 2025. The predicted range of cuts does vary more for 2025 from the conservative end of 1% to much more aggressive cuts closer to 2% in total. Next meeting is set for October 23rd and we will continue to watch all the economic data leading up to that announcement.
Our Take
There is a feeling that inflation is somewhat under control however the employment picture is getting worse. If not for continual high-level of government spending the economy would be much worse off and we question how long this can continue given the lack of productivity we get from this spend. Government spending is generally inefficient compared to the private sector, and is funded by higher taxes.We are still in the world of the Bank of Canada being cautious and data dependent each meeting.
We are seeing more and more clients looking at the variable rate mortgage as an option. Currently we are seeing about half our clients look at a shorter term fixed rate mortgage and the other half looking at variable rate options.
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