Bank of Canada Set for Third Straight Interest Rate Cut

The week will see the Bank of Canada (BoC) implement its third consecutive reduction in the interest rate for the third consecutive week. It is learnt that the central bank is set to reduce the critical interest rate of 25 basis points bringing the overnight rate to a low 4.25%. This follows two sequential downward adjustments as the BoC resumes its strategies to reduce economic stresses.

During the press conference held in July, the BoC Governor Tiff Macklem had already given hints towards the gradual approach. Since then, economic data has increasingly pointed towards the need for further rate cuts. “Our decision is based on two main factors,” said Macklem. “First, regular and underlying inflation levels have declined further than anticipated. Second, as we get close to our inflation target, with remaining capacity in the economy, we want economic activity to increase to close the gap allowing inflation to get back the 2% target in a reasonable time.

CPI Inflation Trends

Macklem observed that the total CPI which included other factors went above the 2% target, but the indicators are such that it remains a temporary situation and explains the monetary policies set at APA. What Macklem had trouble with is that, considering the year’s expected inflation, policies have been in practice detached from inflation’s trajectory over time. ”

“Inflation still exhibits the propulsion of balancing forces,” Macklem restated. “Weakness in the economy tends to reduce inflation but pressures in shelter and in some services alleviate it.” He further observed that these accentuating factors have somewhat weakened since July.

Analysts expect that the BoC will remain on the sidelines and expect cuts of 25 basis units at each meeting till July 2025 taking the benchmark rate to 2.5 %. However, doubts are being raised whether the central bank will be able to go further and cut more than that, especially for some reason, concerning the latest economic data – past arguments on the issue – re-appear.

It has been suggested that the Bank of Canada may refuse to cut rate by more than 50 basis points if the economy deteriorates. This decision may be made in October when the next Monetary Policy Report is released and together with this report the bank’s economic forecast is presented.

Economic and Labor Fluctuations

Canada’s National Economic Analysis has been both on the up and down. In contrast, inflation evaluation for the month of July reported ordinary core inflation suggesting that BoC can stick to the looming reasons. On the contrary, the same picture appears in labor market data. The labour force survey for July was slightly negative with us recording a modest decline in employment with the unemployment rate still high at 6.4 %.

The problems described above also affect the Canadian housing market. Even after the rate cuts, sales of homes are quite weak, and the expenditure on remodels is falling. It is also worrying looking ahead, as mortgage rates are expected to increase over the years 2025 and 2026. This embedded tightening may eventually require the Bank of Canada to be more hawkish than the US Federal Reserve is in coming months, as the Canadian households seem to be affected by the rate hikes for a longer duration.