Bank of Canada Expected to Cut Interest Rates for Third Consecutive Time

The Bank of Canada is widely expected to lower its benchmark interest rate by a quarter percentage point to 4.25 per cent, as economists and investors predict a third consecutive rate cut. The central bank's decision is in response to tepid economic growth, rising unemployment, and declining per-capita consumption. Inflation is drawing closer to the bank's 2-per-cent target, and the U.S. Federal Reserve's rate-cutting cycle is also expected to begin, easing pressure on the Bank of Canada to diverge from its American counterpart.

Key Takeaways:

• The Bank of Canada is expected to cut interest rates for the third consecutive time, with a predicted quarter-point decrease to 4.25 per cent, following six quarter-point cuts by June or July of next year, according to Bloomberg data.
• Interest-rate swaps are pricing in six quarter-point cuts by June or July of next year, which would take the benchmark interest rate to 3 per cent.
• The Bank of Canada's governing council is putting more emphasis on "downside risks" in its deliberations, with Governor Tiff Macklem stating that growth needs to pick up to prevent inflation from falling too much.
• The annual Consumer Price Index growth rate was 2.5 per cent in July, the lowest reading in more than three years, and has resided within the Bank of Canada's control band of 1 per cent to 3 per cent for seven consecutive months.
• Economic conditions in Canada have been tepid for several quarters, with demand softening and the unemployment rate rising to 6.4 per cent, nearly two percentage points higher than a record low set two summers ago.
• The Bank of Canada projects economic growth to pick up in the second half of the year and strengthen through 2025 and 2026 as lower rates give households and businesses more room for spending.
• However, there is a major risk to the consumption outlook: mortgage renewals, as many homeowners will be renewing their mortgages at higher interest rates than in 2020 and 2021, resulting in heftier payments.
• If the labour market deteriorates significantly, the Bank of Canada may opt for larger rate cuts, with Desjardins strategist Royce Mendes suggesting a 0.5 percentage point cut at future meetings.

Statistics:

• Predicted quarter-point decrease: 0.25 percentage points
• Benchmarked interest rate: 4.25 per cent
• Projected annual Consumer Price Index growth rate: 2.5 per cent
• Unemployment rate: 6.4 per cent
• Interest-rate swaps: Pricing in six quarter-point cuts by June or July of next year
• Benchmark interest rate by June or July of next year: 3 per cent
• Aggregate gross domestic product: Propped up by strong population growth
• GDP per capita: Declining
• Mortgage renewal risk: April 2025

Sources:

• Bloomberg data
• The Bank of Canada
• Bank of Montreal
• Desjardins Securities
• The U.S. Federal Reserve
• Bloomberg data (speech by Jerome Powell at the Jackson Hole economic conference)