Canada Housing Market

On September 4, the Bank of Canada is widely expected to deliver its third consecutive interest rate cut as inflation continues to cool on both sides of the Canada-United States border. This move aligns with market expectations, which also anticipate the U.S. Federal Reserve to begin its own rate-cutting cycle later this month.

Derek Holt, Vice-President and Head of Capital Market Economics at Scotiabank, told Global News that he expects both the Bank of Canada and the U.S. Federal Reserve to implement quarter-point rate cuts in September. “I think the catch for Canada is that eventually we need the Federal Reserve to start easing policy itself,” Holt said. He added that without similar action from the Fed, the Bank of Canada’s easing could be halted prematurely.

Inflation in Canada has been gradually cooling amid mild economic growth throughout 2024. This trend allowed the Bank of Canada to start reducing its benchmark policy rate from elevated levels earlier this year. However, concerns about inflation reigniting in the U.S. have been dampened by a downbeat July jobs report, which bolstered expectations for upcoming rate cuts by the Fed.

Fed Chair Jerome Powell confirmed in late August that “the time has come” for a long-awaited policy shift, signaling a potential rate cut in the near future. These developments provide some reassurance for Bank of Canada Governor Tiff Macklem, who was alongside Powell at the Fed’s recent monetary policy conference in Jackson Hole, Wyoming.

Despite leading the rate-cutting cycle ahead of the U.S. Fed, Macklem may face challenges if the Canadian dollar weakens significantly compared to the U.S. dollar. “If [Macklem] were to continue to cut aggressively with the Fed on the sidelines, you’d get the Canadian dollar probably really softening,” Holt explained, noting that a weakened loonie could make American imports more expensive and potentially refuel inflation in Canada.

Claire Fan, an economist at RBC, noted that while inflation in Canada has cooled to 2.5 percent annually as of July, there is still uncertainty surrounding the rate path in the U.S. after September. Fan emphasized that the “softening economic background” in Canada provides the central bank with the necessary bandwidth to continue lowering interest rates without significantly worrying about inflation surging again.

As both central banks navigate their respective economic landscapes, the coming months will be crucial in determining the effectiveness of these monetary policy shifts.

Source: Bank of Canada expected to cut interest rate Wednesday | Financial Post