Bank of Canada Interest Rate Announcement (July 24, 2024)

Bank of Canada cuts its policy rate to 4.5%

• The Bank of Canada cut the overnight rate to 4.50% (from 4.75%), while stating that it will continue with Quantitative Tightening (QT).
• The Bank outlined a relatively dovish take on the economy, stating that "…the economy's potential output is still growing faster than GDP, which means excess supply has increased. Household spending, including both consumer purchases and housing, has been weak. There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work."
• On inflation, the Bank painted a less dovish picture than what was communicated in their June decision. However, it still noted that headline inflation moderated last month, preferred core measures remained below 3%, and that the breadth of price increases in the CPI is near its historical norm.
• The accompanying Monetary Policy Report (MPR) showed a downgrade to annual average real GDP growth in 2024 (1.2% vs 1.5%), reflecting a weaker-than-expected first quarter performance. However, growth in 2024Q3 is seen as accelerating to 2.8% annualized. For 2025, the Bank's GDP growth forecast is relatively unchanged at 2.1%. Despite the dovish overall tone in the statement, we're still below the Bank in terms of expected GDP growth next year. This reflects our relatively more cautious view around consumption (and housing) that will continue to feel the pinch of elevated rates. In 2026, the Bank now sees growth at 2.4% versus 1.9% in the April MPR.
• The Bank upgraded its 2024 forecast for overall inflation (2.4% on a Q4/Q4 basis, versus 2.2% in April). In 2024Q3, inflation is expected at 2.3%. Meanwhile, its 2025 and 2026 forecasts were downgraded a touch (2.0% in both years versus forecasts of 2.1%). Meanwhile, core inflation (expressed as the average of the Bank's preferred measures) is seen at 2.4% this year, before easing to 2% in 2025 and 2026. For the latter two years, inflation is expected to remain well behaved, even with economic growth forecast to exceed potential, as slack built up this year is absorbed.

Key Implications

• And just like that, Canadians were treated to a bit more rate relief today. With job market slack rapidly building, the economy in excess supply, inflation expectations continuing to normalize and U.S. policymakers now openly musing about lowing their own policy rate, the Bank of Canada was comfortable enough to trim its policy rate. The BoC doesn’t appear overly concerned about the recent regression in core inflation trends. We should note that even with today's move, a 4.50% policy rate that's well north of inflation is still quite restrictive and as such, the economy will still feel its pressure.
• Where do we go from here?  In our June outlook, we'd incorporated a year-end target of 4.25%, with the final cut set to take place in the fourth quarter. While the ultimate destination may remain the same, the dovish lean in today's Statement raises the risk of more easing by year-end than what we've penciled in. All eyes now turn to Governor Macklem's press conference at 10:30 am.

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.