With inflation at its 2% target, the Bank of Canada cuts interest rates by 0.5%

Wesley Blight

October 23, 2024

Key takeaways

The Bank of Canada reduced its policy interest rate to 3.75% and expects to cut further.
Inflation eased more than expected in September and is projected to remain close to target.
In portfolios with a tactical asset allocation overlay, we returned to a neutral equity position as the benefit of a more defensive stance diminished and conditions continue to ease.

At the conclusion of the Bank of Canada’s (BoC) October monetary policy meeting, it decided to cut its policy interest rate by an additional 0.5% – bringing the target for the overnight rate to 3.75%. The move was widely anticipated by markets. Of note, this was the BoC’s fourth consecutive rate cut decision and it expects to cut further if the economy “evolves broadly in-line” with its latest forecasts.

Inflation is on target and should stay there

In Canada, consumer price index (CPI) inflation declined to 1.6% in September, dropping significantly since June (2.7%). Core inflation, which strips out food and energy, is at 2.3%. “With inflationary pressures no longer broad-based, business and consumer inflation expectations have largely normalized,” said the Bank. Additionally, it added, “the Bank expects inflation to remain close to the target over the projection horizon, with the upward and downward pressures on inflation roughly balancing out.”

Globally, inflation in most developed economies has declined and is now around central bank targets. Financial conditions have continued to ease as market participants anticipate lower policy rates.

Global growth is expected to strengthen

The BoC expects Canadian gross domestic product (GDP) growth of 1.2% for 2024, 2.1% in 2025 and 2.3% in 2026. Recently, consumption has grown (but has declined on a per person basis), exports have seen a boost and labour markets remain soft. Lower interest rates should support growth through 2026.

The Bank continues to forecast global economic growth of 3% over the next two years, mostly driven by projections of strong U.S. growth.

Opportunity and risks are roughly in balance

returning our tactical equity allocation to a neutral position relative to fixed income and cash. The benefit of a more defensive position has diminished as most central banks have started interest rate cutting cycles, easing conditions.

Recent economic revisions show a stronger backdrop for growth in the U.S. and the anticipation of more proactive stimulus in China reduces risks to the global economy. The U.S. election, geopolitical risk, and still weaker growth out of the Eurozone may still present some headwinds.

The BoC’s next interest rate announcement is scheduled for December 11^th.

Wesley Blight

Wesley Blight, CFA, CIM, FCSI, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.

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