The Bank of Canada has made a major move by reducing its benchmark rate of interest to 3.75 percent in October 2024, which was expected. It also signaled that the rate would continue to be lowered if the economy continues to develop according to expectations.
The bank is willing to continue exploring rate reductions in the event that the economic situation continues as expected.
Bank of Canada has reduced its interest rate by 25 basis points. This is the third time it’s done so.
Recent data showed a dramatic drop in Canadian Inflation rates. This technique was inspired by this.
In September the inflation rate dropped to just 1.6%. This is the first drop below 2% in the last three years.
The bank also noted that the per capita consumer was down and there is a softening of labour markets, as evidenced by a rise in unemployment to 6.5%, a rate not seen for over two years.
These indicators together suggested that lower borrowing rates were needed to ease the economic pressures.
The Monetary Policy report: Insights
Inflation and GDP growth are discussed in the Bank of Canada’s latest Monetary Policy Report.
Inflation risks appear to be balanced on both sides. Policymakers anticipate that inflation will remain close to the target level in the near future.
The bank also predicts that the GDP will grow by a modest 1.2% this year and a higher 2.1% next year.
These figures are conservatively optimistic, given the persistent concerns about economic conditions.
The GDP is projected to grow steadily during the forecast period, with interest rates decreasing.
The forecast includes the effect of modestly higher consumer spending per capita and slower population growth.
The growth in residential investment is expected to also accelerate, as a robust housing demand will drive up renovation and sales spending.
As demand increases, business investment will increase. Exports are expected to remain strong due to the sustained US demand.
The Bank of England forecasts that inflation will remain close to its target over the projected period. Both upwards and downward pressures are expected to be roughly equal.
As excess demand in the economy absorbs the surplus supply, the upward pressure of housing and services gradually fades.
The Bank anticipates a GDP increase of 1,2% in 2024. This will be followed by 2,1% in 2025 and 2,3% in 2026. The excess supply gradually disappears as the economy grows.
Global economic outlook of Bank of Canada
The Bank of Canada, according to its latest Monetary Policy Report continues to forecast that global economic growth will be around 3% in the next two-year period.
It is interesting to note that the United States’ economic growth outlook seems to be weaker than previous estimates.
The eurozone has seen a slow growth, but it is expected to show a small recovery in the coming year.
Recent drops in the inflation rate have brought advanced economies closer to their central bank-set targets.
Since July, the global financial environment has become more relaxed, in part due to expectations that policy interest rates will be lower.
The current oil price is about $10 less than the estimate in the Monetary Policy Report for July.
The Bank of Canada has carefully considered the various factors that influence the global economy.
Why is it important to reduce the interest rate?
Bank of Canada’s decision to reduce its key interest rate will have significant ramifications on a wide range of participants in the economy.
The bank hopes that by lowering the borrowing rate, it will increase investment and consumption, thereby increasing economic activity.
Reduced interest rates can also be a relief for both households and businesses, as they reduce the costs of debt servicing. This could lead to a higher income or improved financial stability.
This rate reduction demonstrates that the Canadian central bank is committed to supporting economic recovery, addressing current challenges and maintaining a stable, sustainable and economic environment.
The Bank of Canada has demonstrated its ability to respond to changing economic conditions by lowering its benchmark rate.
The bank is hoping to reduce uncertainty by changing its monetary policies to deal with the complexity of inflation and economic growth.
As new information becomes available, this post Bank of Canada lowers key interest rates by 50 basis points to 3.75% amid slowdown in the economy may be updated.
