Tiff Macklem, Governor of the Bank of Canada, speaks at a press conference in Ottawa on June 5, 2024, about the bank’s latest interest rate decision. The Canadian Press
Economists and market experts are eagerly anticipating another interest rate cut from the Bank of Canada this week. The expectation is driven by recent signs that inflation is easing more than previously thought.
The buzz around a possible rate cut started after Statistics Canada released new data showing that annual inflation slowed to 2.7% in June. This figure was lower than the 2.8% that analysts had expected, sparking optimism that the Bank of Canada might reduce its overnight lending rate again when it meets for its scheduled announcement on Wednesday. The central bank had already lowered the rate by 0.25% last month, its first cut in over four years.
Royce Mendes, a key strategist at Desjardins, believes that another rate cut is very likely. He argues that a single cut wouldn’t significantly affect the economy or inflation, so it makes sense for the Bank of Canada to implement consecutive cuts before pausing. Mendes points to other recent data, including rising unemployment and a slowdown in business growth expectations, as additional support for this view.
Last month’s rate cut lowered the key rate from 5% to 4.75%. Mendes notes that despite this reduction, current interest rates are still quite high and restrictive, which is evident from trends in consumer spending and the housing market. If the Bank of Canada opts not to cut rates again this week, Mendes suggests it could risk pushing the economy toward a recession just to achieve a marginal reduction in inflation.
Other data reinforces the likelihood of a second cut. Statistics Canada’s retail sales report for May showed a decline of 0.8% to $66.1 billion, with most sectors experiencing a drop. This suggests that consumers are tightening their belts, which might prompt the Bank of Canada to lower rates to boost spending.
Recent job market statistics also indicate a slowing economy. The unemployment rate ticked up to 6.4% in June from 6.2% in May, the highest rate since January 2022. This rise in unemployment further supports the argument for another rate cut.
Despite these factors, not everyone is convinced that a rate cut is guaranteed. Clay Jarvis, a mortgage and real estate expert, points out that reducing the rate while inflation remains above 2% could be unusual for the cautious central bank. He suggests that even if the Bank of Canada does cut rates, it might not significantly impact Canada’s housing market, where buyers are still concerned about high mortgage payments.
A recent survey by CPA Canada and BDO Debt Solutions found that many Canadians are still feeling the pinch from previous rate hikes. About half of the respondents said that rising interest rates have worsened their debt situation, and a majority believe that additional rate cuts won’t alleviate their financial pressures.
