- Randall Bartlett, Senior Director of Canadian Economics • LJ Valencia, Economic Analyst
Essentials of Monetary Policy
Bank of Canada: A Big Move in October Is Likely to Be Followed by More Modest Cuts Ahead
October 23, 2024
According to the Bank of Canada (BoC)
- As was widely expected, the Bank of Canada cut the overnight policy rate for the fourth consecutive meeting, this time by 50 basis points (bps), in line with our long-held call. Today’s cut takes the policy rate to 3.75%, the lowest it’s been since November 2022.
- Bank of Canada Governor Tiff Macklem left no room for equivocation in his press conference opening statement: “We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target… Price pressures are no longer broad-based, and both our measures of core inflation are now under 2½%. Our surveys also find that business and consumer expectations of inflation have shifted down and are nearing normal. All this suggests we are back to low inflation.”
- In this context, the Bank adjusted its outlook for CPI inflation lower in 2024 to 2.5% from 2.6% back in July (graph 1). This forecast revision is the result of a Q3 2024 inflation print that was weaker than the central bank had expected, at 2.1% versus 2.3% respectively and a Q4 2024 forecast that was similarly marked down. The Bank’s inflation forecast for 2025 was also reduced to 2.2% from 2.4%. In contrast, core CPI inflation has been tracking slightly higher than the Bank’s July outlook.
- Meanwhile, the Bank left its real GDP growth forecast largely unchanged for 2024 at 1.2%. This despite reducing its overly optimistic outlook for Q3 real GDP growth from 2.8% annualized to 1.5% (graph 2), in line with our most recent tracking. In 2025, the growth forecast was left unchanged from the July Monetary Policy Report (MPR), at 2.1%. Meanwhile, real GDP growth in 2026 was revised a tick lower to 2.3% after a substantial upward revision in July. According to Governor Macklem, “This forecast largely reflects the net effect of a gradual pick up in consumer spending per person and slower population growth.”
- The Bank of Canada also recommitted to its policy of balance sheet normalization. As a result, the central bank will continue quantitative tightening, allowing bonds to mature and roll off of its balance sheet, thereby reducing its footprint in the Government of Canada bond market.
Implications
The Bank of Canada decided to go big as opposed to going home in its October 2024 rate announcement. The last time the Bank cut by 50 bps outside of the pandemic was in 2009, and outside of a Canadian recession it was 2001. But unlike past periods of deep rate cuts, the Bank doesn’t see an economic contraction on the horizon. Instead, according to Governor Macklem, “Now our focus is to maintain low, stable inflation. We need to stick the landing… That means the upward and downward forces on inflation need to balance out… Overall, we view the risks around our inflation forecast as reasonably balanced.”
Looking ahead, we haven’t seen the end of rate cuts. Clearly, the BoC was unfazed by the recent employment report, noting instead the slack continuing to build in the job market, something we have been stressing. Moreover, the high saving rate is another key factor, with the BoC noting that the focus towards saving was a legacy of the tightening cycle. Sticking the landing will require incentivizing households to spend again as opposed to saving.
Altogether, according to the Governing Council in the press release that accompanied the rate announcement: “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.” We expect another 25 bps rate cut in December, and six more of the same magnitude in 2025.
2024 Schedule of Central Bank Meetings
