What the Bank of Canada Did
On June 5, 2024, the Bank of Canada reduced its target for the overnight rate to 4.75%, with the Bank Rate at 5% and the deposit rate at 4.75%. The Bank is continuing its policy of balance sheet normalization.
This is a quarter of a percent drop — the first cut after a long stretch of holding rates high to cool inflation.
The Global Picture
The global economy grew by about 3% in the first quarter of 2024, roughly in line with the Bank's April forecast. In the United States, growth came in slower than expected. Weakness in exports and inventories weighed on activity, though consumer and business spending stayed strong but eased a bit. In the euro area, activity picked up in the first quarter. China's economy also strengthened, helped by exports and industrial production, even as domestic demand remained weak.
Inflation in most advanced economies continues to ease, though the path toward price stability is bumpy and uneven across regions. Oil prices have stayed close to the Bank's April assumptions, and financial conditions are little changed since then.
What Happened in Canada
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 the Bank forecast in April. 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 easing gradually. Overall, recent data suggest the economy is still operating below full capacity — there's slack in the system.
Where Inflation Stands
CPI inflation eased further in April, to 2.7%. The Bank's preferred measures of core inflation (the ones that strip out volatile stuff like gas and groceries) also slowed, and three-month trends suggest continued downward momentum. Indicators of how many components of the CPI are rising have moved down further and are near their historical average.
Shelter price inflation — rent, mortgage interest costs, and the like — remains high.
Why the Bank Cut Rates
With continued evidence that underlying inflation is easing, the Bank's Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by a quarter percent. Recent data has increased the Bank's confidence that inflation will continue to move toward the 2% target.
That said, risks to the inflation outlook remain. The Bank 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 committed to restoring price stability for Canadians.
What to Watch Next
The next scheduled date for announcing the overnight rate target is July 24, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the Monetary Policy Report at the same time.
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