Bank of Canada Expected to Cut Interest Rate for Second Straight Time

Strategic Insights -

The Bank of Canada is anticipated to decrease its overnight lending rate for the second consecutive time on Wednesday, a move driven by a weaker-than-expected economy, including a rapidly increasing unemployment rate. The unemployment rate has risen by 1.6 percentage points since the depths of the COVID-19 pandemic, reaching 6.4% in June. Economists at RBC point out that this increase is unprecedented, and its large size suggests the economy may be heading into a recession.

Key Takeaways:

  • The Bank of Canada is likely to lower its key rate by a quarter of a percentage point to 4.5% from 4.75%.
  • The unemployment rate has increased by 1.6 percentage points to 6.4% since the COVID-19 pandemic, a larger increase than any other in the 1970s without a recession.
  • RBC economists expect three more back-to-back rate cuts, bringing the overnight rate to 4% by the end of the year.
  • The Bank of Canada's easing cycle is underway, with a history of two consecutive rate cuts in five out of six previous cycles.
  • Inflation has been heading downward, but TD economist Leslie Preston notes the risk of a rise in "core" inflation, which could hinder further rate cuts.
  • Economists argue that the Bank of Canada's decision is also influenced by a desire to save face and respond to a rapid weakening of the economy.

Statistics:

  • The unemployment rate has increased by 1.6 percentage points to 6.4%.
  • The Bank of Canada has raised rates 10 times between March 2022 and last summer to combat inflation.
  • Inflation peaked at 8.1% in June 2022.
  • The Bank of Canada is expected to cut interest rates for the second straight time in the same year.

Sources:

  • RBC economists Nathan Janzen and Carrie Freestone ([www.thestar.com](http://www.thestar.com))
  • Scotiabank economist Derek Holt ([www.thestar.com](http://www.thestar.com))
  • TD economist Leslie Preston ([www.thestar.com](http://www.thestar.com))