The Bank of Canada (BoC) will announce its latest decision regarding the overnight rate target on December 11, 2024.
As the year draws to a close, Canada’s economic outlook is one of cautious growth, with several factors influencing the BoC’s potential course of action. Canada’s GDP growth for the third quarter of 2024 stood at 1%, well below the BoC’s forecast of 1.5%. This miss highlights a key issue for the central bank: economic growth has been weaker than expected, making it more challenging to combat inflation.
A key concern is the continued contraction in GDP per capita, which has persisted for several quarters. This contraction reflects the reality faced by many Canadians, who may be feeling less prosperous even as the overall economy shows signs of growth. The BoC’s challenge is to balance these mixed signals, attempting to stimulate growth while avoiding further inflationary pressures.
The upcoming rate decision will likely focus on the underlying weakness in the economy, particularly in the labor market and housing sectors. Economic indicators, such as the labor market statistics set for release on December 8, are pivotal in shaping the BoC’s thinking. With unemployment expected to rise slightly from 6.5% to 6.7%, concerns over job creation and the tight labor market will weigh heavily on the BoC’s considerations.
Despite adding 1.2 million people to Canada’s labor force over the past year, job creation has not kept pace, with only a fraction of the new workforce finding employment. This mismatch between labor supply and demand has resulted in higher competition for jobs, making it more difficult for people to secure new positions. These dynamics have created strain on households, particularly those dealing with the financial implications of a sluggish job market.
The housing market is another critical area for the Bank of Canada. While inflation has been a concern throughout the year, there are signs that it is moderating, giving the BoC some room to maneuver. However, the housing sector is facing its own set of challenges, especially in major markets like Toronto and Vancouver.
A significant issue for the housing market has been the overvaluation of pre-sale properties, particularly in Ontario. Many buyers in the Greater Toronto Area (GTA) are finding themselves with properties that are worth significantly less than what they paid for them, leading to potential losses for investors. This has created a psychological barrier in the market, as many investors have pulled back from pre-sale purchases. With housing starts expected to continue declining, the construction sector could face tough times ahead.
The tightening of capital in the real estate development space, exacerbated by a growing number of insolvencies among developers, is also contributing to uncertainty. This will likely impact job growth in the construction sector, especially in Ontario, where many of the challenges are concentrated.
As the BoC prepares for its next interest rate announcement, markets are anticipating a possible rate cut of 25 basis points. However, there is a chance the bank could be more aggressive, with some analysts predicting a 50 basis point reduction. The decision will largely depend on the BoC’s assessment of the overall economy, including the latest labor market data and trends in inflation.
The Canadian dollar, which has been under pressure for much of the year, may also factor into the decision. A weakening currency, compounded by economic challenges, could prompt the central bank to act more decisively to stimulate growth.
Now, all eyes will be on the Bank of Canada’s December 11 interest rate announcement. With a sluggish economy, concerns over inflation, and challenges in the housing and labor markets, the BoC’s decision will be crucial in shaping the country’s economic trajectory for the coming months. Whether the bank opts for a modest rate cut or a more substantial adjustment, it will need to balance the need for economic stimulus with the risks of stoking inflation further.