Bank of Canada Monetary Policy Report: What It Means for Everyday Canadians

The Bank of Canada (BoC) Monetary Policy Report offers insight into the economic conditions that influence their decisions regarding interest rate. The Monetary Policy Report was released along with the announcement of the interest rate cut on July 24, and shares the influences behind the most recent rate cut, the drivers of future (possible) interest rate cuts, and where Canada stands when it comes to housing, inflation and the general economy.

A note about Canada’s monetary policy and inflation

The objective of Canada’s monetary policy is to promote the economic and financial well-being of Canadians. To reach this objective, the country needs a low and stable inflation environment. The Bank of Canada has set the inflation target at 2% — the midpoint of their 1% – 3% target range.

In recent years, inflation has dramatically exceeded this range, which has affected interest rates – the consistent interest rate raises in 2022 and 2023 were an effort to try to curb inflation in Canada.

Where Canada stands today…

…On interest rates

The Bank of Canada cut its benchmark interest rate to 4.5% on July 24 in response to slowing in the economy, softening in the labour markets and a drop in inflation. The interest rate cut is the second straight rate cut announced by the BoC and is a good signal for borrowers, homeowners and prospective homebuyers.

… On inflation

Inflation has come down from its peak of 8.1% in June 2022 to 2.7% in June 2024, steadily moving closer to the 2% target in response to monetary policy. Looking ahead, Bank of Canada Governor Tiff Macklem says Canadians can expect inflation to come down further (although not necessarily in a smooth, downward trajectory). And if it continues to ease broadly as expected, more interest rate cuts may be in store for Canadians.

… On unemployment

As of June, 2024, the unemployment rate in Canada sits at 6.4% – a rise from a low of 5% in June 2022.  This increase can be attributed to a sharp pullback in hiring activities — indeed, businesses in Canada have been reporting subdued sales expectations for some time. This is largely a result from households reducing their spending after having to contend with rising interest rates and debt -servicing expenses. This in turn, has led to a decline in the demand for labour.

While the rise in unemployment isn’t necessarily a surprise given a weaker economy, it does represent a challenging situation for many workers, particularly youth and newcomers. The unemployment rates for newcomers and youth have risen to 11.6% and 13.5% respectively, highlighting a difficulty both groups share in finding work this summer.

… On housing

The decrease in interest rates is a positive sign for buyers looking to enter the market, as payments become more affordable.

Canada experienced a slow spring resale market. However, the number of new listings did rise month over month in June, likely driven by sellers anticipating greater market activity as rates continue to come down.

Currently, there is some excess supply and time will tell whether this second interest rate cut will spark more activity in the housing market. Renovation spending has been weak lately, driven by higher costs of borrowing, but this too may turn around with interest rates starting to decline.

So, what does this all mean for everyday Canadians?

There appears to be increasing confidence that inflation is coming down to where it needs to be, and in turn, interest rates are expected to continue decreasing. For Canadians, this means that the cost of borrowing (in the form of mortgages, loans, lines of credit) should come down, while the growth in cost of everyday goods and services (food, gasoline, shelter expenses) will remain relatively stable. While you won’t see a big drop in your grocery bill, neither will you be shocked by rapidly rising costs with each visit to the grocery store.

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