The Bank of Canada will announce its latest interest rate decision this Wednesday, with many experts predicting a second consecutive reduction in borrowing costs.
Economic Signals and Market Predictions
Anticipation is high as the central bank prepares to make its decision, especially with new surveys indicating that many Canadians burdened by debt are hoping for relief through lower interest rates. As of Monday, market expectations heavily favored a 25-basis-point cut, potentially lowering the benchmark rate to 4.5%.
This follows last month’s significant rate cut, the first in over four years, where Bank of Canada Governor Tiff Macklem suggested a gradual approach to future cuts, based on careful analysis of economic data.
Recent inflation data from June, released last week, has bolstered the case for another cut on Wednesday, according to Benjamin Reitzes, managing director and macro strategist at BMO.
Inflation Trends and Economic Indicators
Following a minor increase in inflation in May, June’s numbers indicated a return to easing price pressures, with an annual rate of 2.7%. Core inflation, a critical measure for the Bank of Canada, also showed signs of cooling.
Beyond inflation, the Bank of Canada has observed further indications of slowing in the labor market and retail sales, which Reitzes noted should give policymakers the confidence that conditions are ripe for continued easing of prices.
“That gives the (Bank of Canada) a big green light to cut this week,” Reitzes commented in a recent note.
Jeremy Kronick, associate vice-president and director at the CD Howe Institute, also anticipates a rate cut this Wednesday. Despite some persistent inflationary elements such as wage growth, Kronick believes the Bank will focus on the overall trend of economic softening to justify further interest rate reductions.
Consumer Debt and Public Sentiment
The policy rate set by the Bank of Canada significantly influences borrowing costs nationwide, impacting loan rates, including mortgages. The latest MNP Consumer Debt Index, released on Monday, reflects a continued concern among Canadians regarding their debt levels despite last month’s rate cut.
The index, based on quarterly surveys from Ipsos, dropped to 85 in the second quarter, down six points from the previous iteration. Two-thirds (66%) of those surveyed said they “desperately need interest rates to go down.” Over half (56%) expressed that interest rates might not fall quickly enough to provide financial relief, while a similar number (57%) said they would need interest rates to go down “a lot” before their finances would improve.
Impact on Mortgages and Future Cuts
Kronick mentioned that another rate reduction on Wednesday would significantly impact Canadians with variable mortgage payments that adjust with the central bank’s benchmark rate. For those with fixed-rate mortgages, which are the most popular option in Canada, the decision might not have an immediate effect, as these rates are derived from movements in the bond market, which already anticipates future interest rate cuts from the central bank.
“Absent a major, major shock, I still would expect that rates are going to continue to fall. Really, the pace is the question,” Kronick said.
Reitzes expects additional rate cuts in October and December, leaving the Bank of Canada’s policy rate at an even 4.0% heading into 2025. However, Kronick cautions that while the Bank of Canada has room to continue cutting rates, it will likely remain cautious in the latter months of the year, monitoring progress on core inflation and wage growth before making further reductions.
Conclusion
In addition to the rate decision, the Bank of Canada will release updated economic outlooks on Wednesday, forecasting the path back to its two-per-cent inflation goal and revised expectations for economic growth. For Canadians bracing for the impact of upcoming mortgage renewals, this week’s decision might offer some relief and indicate a positive trend towards lower borrowing costs in the future.
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