Will the Bank of Canada Cut Interest Rates This Year?

Heading into the summer, the big question on everyone’s mind was if the Bank of Canada would cut interest rates. Well, the central bank has answered that question by becoming the first G7 institution to pivot on monetary policy and pull the trigger on a rate reduction.

At the central bank’s June policy meeting, officials lowered the key policy rate by a quarter point, from five per cent to 4.75 per cent. Despite the annual inflation rate still far from its two per cent target inflation – the consumer price index (CPI) slowed to 2.7 per cent in June – the monetary authorities believed that the country was heading sustainably toward the two per cent objective.

Citing the literature by economist Milton Friedman, officials believe that monetary policy functions with a “long and variable lag,” meaning that the effects of central bank accounts might not be felt for some time. So, on the inflation front, if officials are waiting for inflation to reach two per cent, then they may have waited too long.

Fast forward to the July meeting, and officials agreed to again lower the benchmark interest rate by another 25 basis points to 4.5 per cent. Then, September’s meeting saw yet another quarter-point drop.

In July’s announcement, BoC governor Tiff Macklem purported that the economy was slowing enough to suggest that public policymakers were on the cusp of restoring price stability.

“Economic growth in Canada has picked up, but remains weak relative to population growth. Household spending has been soft,” Macklem told reporters at the post-meeting press conference. “If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy rate. The timing will depend on how we see these opposing forces play out.”

Still, this does not confirm that the BoC is on a predetermined path to keep cutting rates, he added.

The reason? Shelter costs and services inflation are keeping stubborn and sticky inflation prevalent in the Canadian economy. He noted that services inflation has been driven largely by wage increases.

Ultimately, like the Federal Reserve south of the border, the Bank of Canada intends to be data-dependent on a meeting-by-meeting basis.

“Our forecast has inflation declining gradually,” he said. “It is reasonable to expect further cuts, but the timing is going to depend on incoming data and importantly what that data tells us about where inflation is headed.”

Will the central bank employ another rate cut before the year’s end?

What the Financial Markets Are Saying About Rate Cuts

By the end of the July 24 trading session, yields on short- and medium-term debt securities slumped. The benchmark five-year yield fell to 3.30 per cent, while the ten-year yield dipped to 3.39 per cent.

It is not surprising that market watchers anticipate additional easing as the year progresses and heading into 2025.

“We expect more rate relief will be on the way, but it’s important to remember the BoC is data-dependent. They’re going to make their decision on a meeting-by-meeting basis, taking in the state of the economy and inflation as data slowly rolls in,” said TD economist Andrew Hencic in a note. So, while we’re now in the phase of rate cuts, we expect the central bank to gradually reduce interest rates into 2025.”

The big banks anticipate more rate cuts before 2024 is through.

“It is definitely a clear shift in tone,” said BMO chief economist Douglas Porter following the announcement. “It almost does seem like now the bias is to continue cutting. They almost need to be persuaded not to keep cutting, I think.”

But what does this mean for prospective homeowners in today’s Canadian real estate market?

According to the Royal Bank of Canada, first-time homebuyers might garner some confidence as the central bank continues to lower interest rates. Additionally, this would be good news for variable-rate mortgage holders because as rates trend lower, homeowners’ monthly mortgage payments may start falling.

The conventional fixed five-year mortgage rate is still hovering around six per cent, according to the Canada Mortgage and Housing Corporation (CMHC).

At the same time, mortgage holders who are expected to renew their mortgages in the next two years may still endure a “rate shock,” RBC experts noted.

“Nearly half of all Canadian mortgages are renewing in the next two years – and many of these mortgages were signed when rates were considerably lower (in 2022, the Bank of Canada’s policy rate was as low as 0.5% and mortgage rates around 2%),” the bank stated. “While the rate cut is welcome news, many renewers will still experience higher mortgage payments than they have today.”

The Bank of Canada will convene its next meeting on October 23, 2024. For now, it appears that the central bank could trim rates again, offering further relief for homeowners and homebuyers.