The Bank of Canada is widely anticipated to cut interest rates again on Wednesday as inflation continues to ease. This would mark the second consecutive rate cut following last month’s 25-basis-point reduction, which brought the central bank’s key rate to 4.75 percent from five percent. Economists and market watchers believe the Bank of Canada is likely to deliver another quarter-point cut amid mounting evidence that inflation is sustainably moderating.
The latest Statistics Canada inflation report showed annual inflation cooled to 2.7 percent in June, slightly below market expectations of 2.8 percent. “I think it’s very likely the Bank of Canada cuts rates again next week,” said Royce Mendes, managing director and head of macro strategy at Desjardins. “It always made sense that the Bank of Canada was likely going to do at least two rate cuts in a row before pausing, and recent data has reinforced that view.”
The current inflation remains above the Bank of Canada’s two percent target, but measures to delay further adjustments could elevate the risks of negative economic impacts.
“The interest rates at the levels they are currently are very restrictive. Delaying a rate cut would signal a willingness to tip the economy into recession just to lower inflation by a few tenths of a percentage point more,” Mendes explained. Recent statistics paint a similar picture.
Analysts predict another rate cut
Statistics Canada reported a 0.8 percent drop in retail sales for May, with lower sales across most subsectors. Meanwhile, the latest job market data from June showed the economy losing 1,400 jobs and the unemployment rate rising to 6.4 percent, the highest since January 2022.
However, not all experts agree. Clay Jarvis, a mortgage and real estate expert for NerdWallet Canada, suggested the decision could swing either way. “Considering how cautious the bank is, reducing the overnight rate when inflation is still over two percent would be fairly uncharacteristic,” Jarvis said.
A survey conducted by CPA Canada and BDO Debt Solutions found that nearly half of Canadians say interest rate hikes have negatively impacted their debt loads, and a majority reported that the June rate cut had no significant impact on their financial outlook. The survey also indicated that many believe further rate cuts may not substantially alleviate financial strain. As the Bank of Canada’s rate announcement approaches, market participants remain vigilant, analyzing the implications of another potential rate cut on the broader Canadian economy.
The central bank will publish a new forecast for inflation and economic growth on Wednesday in its quarterly Monetary Policy Report.
