Bank of Canada cuts rates as growth slows more than forecast

The Bank of Canada on June 5 reduced the target overnight interest rate to 4.75 per cent after keeping it at five per cent since July 2023. “Behind their decision is the easing of inflation, but also underperformance of the economy,” says the Chartered Professional Accountants Canada (CPA Canada) chief economist, David-Alexandre Brassard.

The bank says the global economy grew three per cent in the first quarter of 2024, in line with projections. They say inflation in most advanced economies continues to ease “although progress towards price stability is bumpy and proceeding at different speeds across regions,” they state. “In Canada, economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. At 1.7 per cent, first quarter GDP growth was slower than forecast in the (bank’s April) Monetary Policy Report.” 

Shelter price inflation 

They add that inflation eased further in April to 2.7 per cent, although they note that shelter price inflation remains high. “The bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum,” the announcement states. “With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points.” 

Population growth 

Brassard, meanwhile, was more pointed in his response. “The economic resilience to higher interest rates was due to the population growing much faster than anticipated rather than a bettering of economic performance. In Q1 of 2024, economic growth fell short of forecasts. GDP per capita keeps dropping, along with most per capita economic indicators: numbers of jobs, retail sales, household consumption, etc.,” he said in a statement. “The labour market has been able to integrate some of the newcomers to Canada, but it is getting near impossible to create sufficient jobs to sustain population growth. This has led to unemployment rising from five per cent to 6.1 per cent in the span of a year.” 

He adds: “I’m glad to see the Bank of Canada implement its first interest rate cut. There was no need to wait for an additional month to further confirm what we already know: inflation is coming back down and interest rates are seriously restricting economic growth.”