The Bank of Canada is expected to continue cutting interest rates in the coming months. Economists predict a series of rate cuts, with the key overnight rate potentially falling to 3.5% by January 2025. The central bank’s decision to lower rates is driven by a more favorable inflation outlook and a softening economy.
In June, the Consumer Price Index rose at a 2.7% annual rate, close to the bank’s 2% target. However, the job market is showing signs of weakness. The unemployment rate reached 6.4% in July, up from 5.8% in December 2023.
This is largely due to increased immigration, which has created more slack in the labor market.
Bank of Canada rate outlook
Canadian consumers are particularly sensitive to interest rate changes compared to their U.S. counterparts.
Many have variable rate or short-term fixed-rate mortgages, meaning they feel the impact of rate adjustments quickly. Rising housing costs, especially in major cities, are also putting pressure on Canadians. Despite this, the Bank of Canada sees the need to support economic growth by making monetary policy less restrictive.
Economists like Doug Porter from BMO anticipate rate cuts at each of the three remaining policy meetings in 2024. Michael Greenberg from Franklin Templeton suggests there could be four or five more cuts over the next year. The pace and extent of the rate cuts will depend on how inflation, the job market, and consumer spending evolve in the coming months.
The Bank of Canada will be closely monitoring these indicators as it makes its rate decisions.
