Bank of Canada Expected to Deliver Second Interest-Rate Cut of the Year

The Bank of Canada is expected to follow up on its rate cut last month with another quarter-point reduction in interest rates, with inflation moderating and economic growth remaining sluggish. The central bank's easing cycle has helped rebalance the economy, cool the housing market, and reanchor consumer prices, with inflation below 3% since the start of the year. However, the question remains how fast the bank will move to get borrowing costs back to a more neutral level, with some analysts warning of the risk of credibility if rates are cut too quickly.

Key Takeaways:

• The Bank of Canada is expected to deliver a second interest-rate cut this week, with a quarter-point reduction in interest rates, bringing the policy rate to 4.5% from 4.75%.
• Inflation has moderated, with the Consumer Price Index (CPI) falling to 2.7% in June, down from a peak of 8.1% two years ago, and below the central bank's 2% target.
• The Canadian economy is stuck in the doldrums, with the unemployment rate rising to 6.4% from a record-low 4.8% two years ago, and businesses expecting weak sales over the next year.
• A Bank of Canada survey found that most businesses expect sales to be weak over the next year and that few are planning large wage or price increases.
• The central bank will publish a new forecast for inflation and economic growth on Wednesday in its quarterly monetary policy report.
• Another rate cut would be good news for homeowners with variable-rate mortgages, but might not have a big impact on interest rates for fixed-rate mortgages, which are determined by bond yields.

Statistics:

• Inflation has been below 3% since the start of the year, down from a peak of 8.1% two years ago.
• The unemployment rate in Canada has risen to 6.4% from a record-low 4.8% two years ago.
• 22 out of 30 economists polled by Reuters expect a quarter-point cut in interest rates this week.
• The odds of a quarter-point cut on Wednesday are at around 90% according to Refinitiv data.
• The Bank of Canada's easing cycle has helped rebalance the economy, cool the housing market, and reanchor consumer prices.

Sources:

• The Bank of Canada report from June 2023
• Interview with Jeremy Kronick, director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute
• Interview with Tu Nguyen, economist with RSM Canada
• Interview with Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce
• Interview with Robert Hogue, assistant chief economist at Royal Bank of Canada
• Reuters poll of 30 economists
• Refinitiv data on interest-rate swap markets