It is widely expected that the Bank of Canada will implement another interest rate reduction on Wednesday, as the trend of easing inflation persists. This would represent the second consecutive decrease, following a 25-basis-point cut last month, which lowered the central bank’s key rate from five percent to 4.75 percent. Analysts and market watchers anticipate that the Bank of Canada is poised to announce another quarter-point decrease, bolstered by growing evidence that inflation is steadily moderating.
The most recent inflation report from Statistics Canada indicated that annual inflation dipped to 2.7 percent in June, just below the market’s forecast of 2.8 percent. “I believe it’s highly probable that the Bank of Canada will cut rates again next week,” stated Royce Mendes, managing director and head of macro strategy at Desjardins. “It always seemed reasonable that the Bank would pursue at least two consecutive rate cuts before opting for a pause, and the latest data supports that perspective.”
While the current inflation rate remains above the Bank of Canada’s target of two percent, postponing further rate adjustments could raise the possibility of adverse economic repercussions.
“The existing interest rates are quite constrictive. If the bank holds off on a rate cut, it would imply a readiness to push the economy into recession merely to reduce inflation by a few tenths of a percentage point further,” Mendes elaborated. Recent data echoes this sentiment.
Forecasts suggest another cut
Statistics Canada noted a 0.8 percent decrease in retail sales for May, with a downturn reported across most sectors. Concurrently, the job market data from June indicated a loss of 1,400 jobs, causing the unemployment rate to rise to 6.4 percent, the highest level recorded since January 2022.
Nonetheless, opinions among experts are not unanimous. Clay Jarvis, a mortgage and real estate analyst for NerdWallet Canada, indicated that the decision could go in either direction. “Given the cautious nature of the bank, lowering the overnight rate while inflation is still beyond two percent would be quite atypical,” Jarvis remarked.
A survey carried out by CPA Canada and BDO Debt Solutions revealed that nearly half of the Canadian population feels that interest rate increases have negatively affected their levels of debt, with a majority indicating that the rate cut in June did not significantly change their financial outlook. Additionally, many respondents believe that further rate cuts may not provide substantial relief from financial pressures. As the Bank of Canada’s rate announcement approaches, market players are closely monitoring and assessing the implications of another possible rate reduction on the overall Canadian economy.
The central bank is set to release a new forecast regarding inflation and economic growth in its quarterly Monetary Policy Report on Wednesday (July 24).
