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Bank of Canada

Bank of Canada Shifts Focus to Economic Growth Over Inflation Concerns

Strategic Insights

— 2 min read

The Bank of Canada's central bankers want to see the economy grow at a rate above potential output to prevent inflation from undershooting their target. This shift in focus comes after years of trying to slow down the economy to curb price growth. According to a summary of discussions ahead of the bank's September 4 rate decision, the governing council members agreed that economic growth above potential output is necessary to take up slack in the economy and keep inflation close to the 2% target. This change in stance could have implications for the pace of interest-rate cuts, with financial markets now putting the odds of an oversized half-point cut on October 23 at around 50%.

Key Takeaways:

  • The Bank of Canada is now focusing on economic growth to prevent inflation from undershooting their target, after years of trying to slow down the economy.
  • The governing council members agree that economic growth above potential output is necessary to take up slack in the economy and keep inflation close to the 2% target.
  • Financial markets now put the odds of an oversized half-point cut on October 23 at around 50%, after the Bank of Canada trimmed its benchmark interest rate by a quarter of a percentage point to 4.25%.
  • The Bank of Canada's policy rate remains well above what they consider to be a neutral level that neither restrains nor stimulates economic growth.
  • Recent economic data have revealed weakness in the Canadian economy, including a softening labour market and weak consumer spending.
  • The Canadian economy is operating below potential, implying further downward pressure on inflation.
  • The labour market is softening, with the unemployment rate increasing to 6.6% and businesses not creating jobs fast enough to absorb the rapid rise in population.

Statistics:

  • The Bank of Canada's benchmark interest rate was trimmed by a quarter of a percentage point to 4.25% on September 4.
  • The odds of an oversized half-point cut on October 23 are now around 50%, according to financial markets.
  • The unemployment rate in Canada has increased to 6.6%, up nearly two percentage points from 2022.
  • Gross domestic product (GDP) growth in the second quarter was stronger than expected, but largely reflected an increase in government spending and idiosyncratic investment.
  • GDP per person declined for the fifth consecutive quarter, and per capita consumption contracted 2.4%.
  • Wage growth remains strong relative to worker productivity, which could prop up service price inflation.

Sources:

  • "Bank of Canada trims interest rate by a quarter of a point" (https://www.theglobeandmail.com/business/article-bank-of-canada-trims-interest-rate-by-quarter-of-a-point/)
  • "Bank of Canada's Tiff Macklem says 50-basis-point cut is on the table" (https://www.theglobeandmail.com/business/article-bank-of-canadas-tiff-macklem-says-50-basis-point-cut-is-on-the-table/)
  • "Canadian economy operating below potential, Statistics Canada says" (https://www.theglobeandmail.com/business/article-canadian-economy-operating-below-potential-statistics-canada-says/)
  • "Bank of Canada's policy rate is too high, many analysts say" (https://www.theglobeandmail.com/business/article/bank-of-canadas-policy-rate-is-too-high-many-analysts-say/)

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