REAL ECONOMY BLOG | September 04, 2024
Authored by RSM Canada
The Bank of Canada reduced its overnight rate to 4.25 per cent amid cooling inflation and soft growth.
The central bank’s dovish statement went so far as to indicate that more rate cuts are coming as inflation continues to decline toward the 2 per cent goal next year. Now, with unemployment rising in a slow job market, the central bank has acknowledged that growth has become a priority.
We expect one more 25 basis-point rate cut this year, ending the year at 4 per cent. In addition, we expect rate cuts to continue next year until the terminal rate is reached, which we estimate to be between 3 per cent and 3.5 per cent.
Slow and steady remain the way forward as the Bank of Canada aims to encourage growth without reigniting inflation.
More disinflation is expected as households renew their mortgages at higher rates and cut discretionary spending. Even shelter and services, which have been the most stubborn inflation components, are easing.
The downside risk to growth has grown as high interest rates restrict consumer spending and business investments. In the last quarter, the economy expanded primarily thanks to government spending.
In addition, new restrictions on temporary residents—both international students and temporary workers—will put a lid on aggregate consumer spending.
Over the past year, consumer spending per capita has declined as households have tightened their purse strings, and aggregate spending has grown only because of population growth through immigration.
The unemployment rate has been rising because of a lack of hiring rather than widespread layoffs, which can be seen through the particularly high unemployment rates among younger workers and newcomers to Canada—those entering the labour market and looking for jobs for the first time.
Rates need to come down for businesses to start hiring again and for these groups to find work.
Now, with fewer immigrants coming in, the slack in the economy will become more apparent. More rate cuts are needed to revive the economy and boost spending per capita.
Let’s Talk!
Call us at 1-855-206-5697 or fill out the form below and we’ll contact you to discuss your specific situation.
This article was written by Tu Nguyen and originally appeared on 2024-09-04. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://realeconomy.rsmus.com/bank-of-canada-cuts-its-policy-rate-to-4-25-amid-cooling-inflation/
RSM Canada LLP is a limited liability partnership that provides public accounting services and is the Canadian member firm of RSM International, a global network of independent assurance, tax and consulting firms. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. The member firms of RSM International collaborate to provide services to global clients but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmcanada.com/about for more information regarding RSM Canada and RSM International.