Understanding the Bank of Canada’s Monetary Policy Report: What It Means for Everyday Canadians

The Bank of Canada’s (BoC) latest Monetary Policy Report provides a comprehensive look at how its monetary policy is shaping critical aspects of the Canadian economy including inflation, employment, economic growth, and consumer spending. Released alongside the announcement of a 0.5% interest rate cut on October 23, 2024, the report not only outlines current economic conditions but also offers projections for the coming years, giving Canadians a glimpse into the potential future trajectory of the economy.

Here are some of the key highlights of the report and what they mean for Canadians:

Inflation

The Bank of Canada cut its benchmark interest rate by 0.5% on October 23^rd, reducing it to 3.75% This is the fourth straight decrease in a row, and the largest single rate drop since March 2020.

Among other factors, this rate decrease is in response to the dip in inflation, which has come down from 2.7% in June 2024 to 1.6% in September. Comfortably within the Bank of Canada’s target range of 1% – 3% today, the inflation rate is expected to remain close to 2% by the BoC for this year and next.

While there are many drivers of overall inflation, here are a few important areas to note:

• Inflation of goods eased to  -1% in September, which includes energy, durables (i.e., goods that don’t need to be purchased very often, such as appliances and computers) and semi-durables (such as clothing and footwear)

• Inflation in shelter services – such as mortgage interest costs and rent – also slowed down, but remains high and one of the biggest contributors to overall inflation

• While the going forward projection for inflation is to remain low, geopolitical shifts could change things. The possibility of a broadening conflict in the Middle East and the war in Ukraine could impact the supply of key commodities and potentially push up inflation in the prices of goods.

Consumer spending

Consumer spending per person continued to decline, likely driven by the lingering impacts of higher interest rates and levels of youth unemployment.

However, spending is expected to pick up, thanks to lowering interest rates and higher household wealth. After all, as the cost of servicing debt comes down alongside interest rates, borrowers may have more disposable income. Consumer confidence is also expected to improve, which naturally translates to an increase in spending activity.

Employment

The unemployment rate rose from 5% at the start of 2023 to 6.5% in September 2024. The increase is mainly due to the challenges of finding a job faced by new entrants to the labour force, most notably newcomers and youth. There could be a few reasons behind this. For one, accommodation and food services have seen weak employment growth – sectors that tend to employ these two groups. Further, the number of newcomers has increased dramatically in recent years.

Housing

The decrease in both interest rates and inflation present positive signals for Canadians. Not only do interest rate decreases bring down variable mortgage rates, but some markets report that growth in rents has eased following an extended period of rent increases.

At the same time, housing prices are likely to go up. Record-low vacancy rates, coupled with interest rate cuts, pent-up demand and recent changes in mortgage rules are expected to spur demand for housing, leading to a moderate pick-up in prices. Further, there is expected growth in resales and renovations, sparked by lower interest rates and higher home prices.

And, while continued high demand should support new construction, limitations on available land, zoning restrictions and a lack of skilled labour could slow the pace of new builds. As a result, housing demand is expected to outpace increases in supply.

So, what does this all mean for everyday Canadians?

The reduction in inflation to its target rate has lowered borrowing costs and stabilized prices for everyday goods. While this doesn’t necessarily mean a significant drop in your daily expenses, you’re also less likely to face price hikes that cut into your purchasing power. Declining interest rates could boost affordability and confidence among homebuyers and borrowers, before leading to a rebound in hiring demand as well. Overall, the Canadian economy may still be weakening but the central bank is doing what it can to lower interest rates which should spur increased housing activity in 2025.

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