On October 28, 2024, the Bank of Canada (BoC) implemented a substantial interest rate cut of 50 basis points, bringing the overnight rate down to 3.75%. This marks the fourth consecutive reduction this year, following a peak rate of 5% last year [ac4361bc]. The decision comes in response to a lower-than-expected Consumer Price Index (CPI) for September, which indicated inflation had decreased to 1.6%, down from 4% in August [0aa56434][4fba7180]. With GDP growth projected to remain below 3% over the next two years, the BoC's actions reflect a cautious approach to stimulating the economy [0aa56434].
However, recent revisions from Statistics Canada have significantly altered the economic landscape. The agency revised Canadian GDP data upward by 1.3% for the years 2021-2023, adjusting the 2023 GDP growth to 1.5% (up from 1.2%), 2022 to 4.2% (from 3.8%), and 2021 to 6.0% (from 5.3%) [90f5ba24]. This upward revision suggests that the economy may not be as weak as previously thought, which could impact future monetary policy decisions. The output gap is now estimated at -1.1%, indicating a risk of inflation rather than deflation, contrary to the BoC's recent rate cut rationale [90f5ba24].
Economist David Rosenberg has advocated for a continued series of cuts, suggesting that the current policy rate remains too high given the economic conditions, including a negative real GDP per capita of 2.5% year-over-year [4fba7180]. Analysts are now estimating a 50% chance of another rate cut in December, which could further influence market dynamics [ac4361bc].
The recent cuts are expected to positively impact Canadian stocks, particularly in sectors such as financials, real estate, and consumer spending, as lower interest rates typically enhance corporate profitability and consumer spending power [ac4361bc]. Market analysts predict that over $100 billion could flow into dividend-paying equities by mid-2025 due to lower bond yields, making these stocks more attractive [ac4361bc].
In a broader context, the European Central Bank (ECB) also announced its third interest rate cut of the year on October 17, 2024, reducing rates by 25 basis points to 3.25%. This marked the first consecutive rate cuts since 2011, reflecting a proactive strategy to stimulate the Eurozone economy amid a deteriorating economic outlook [a7e3252e][79b3b033]. ECB President Christine Lagarde emphasized a data-dependent approach, leading to expectations of further cuts, with analysts predicting a 29 basis point reduction in December [79b3b033].
The ECB's decision was made during a meeting in Ljubljana, Slovenia, where Lagarde highlighted the need for measures to address slow growth in the Eurozone. Economic indicators across Europe have been concerning, with Germany's economy stalling and inflation dipping below the ECB's 2% target for the first time since June 2021 [a7e3252e].
As the Bank of Canada and the ECB navigate these complex dynamics, the Canadian dollar may decline relative to the US dollar if rate cuts continue, further complicating the economic landscape [ac4361bc]. The ongoing conflict in the Middle East has also contributed to rising oil prices, impacting global economic conditions [a7e3252e]. As central banks make critical decisions, the implications for global financial markets and economic recovery efforts will be closely monitored [5fb18510].