The Bank of Canada (BoC) is set to reduce its overnight interest rate by 25 basis points to 4.50% on Wednesday, July 24, 2024, according to a recent poll conducted by Reuters. This decision comes amid widespread expectations of falling inflation and a cooling economy.
Economic Context and Rate Predictions: The Canadian economy is showing signs of slowing, with rising unemployment and a softer corporate outlook contributing to the need for rate cuts. Despite these challenges, core inflation and wage growth remain concerns. However, the majority of economists believe that the BoC will proceed with a rate cut, marking the second reduction in borrowing costs in two months .
Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, commented, “Second-quarter CPI inflation is tracking below what the Bank had forecast in April, and the business outlook survey was extremely dovish. The pieces are in place for the BoC to cut rates again at its meeting next week.”
The BoC is expected to pause its rate-cutting cycle at the September meeting, with additional reductions anticipated in October and December. This projection suggests the BoC will act ahead of the U.S. Federal Reserve, which is expected to begin its easing cycle in September. A slim majority of economists predict the policy rate will be 4.00% by the end of the year, although risks remain skewed toward fewer rate cuts.
Despite the easing inflation, risks remain tilted toward higher price pressures. Kelvin noted, “Additional rate cuts beyond July will require inflation decelerating further. We do expect it will happen.”
The BoC’s confidence may be bolstered if the housing market remains stable. Average home prices have been declining, which could support the central bank’s gradual easing approach. Tony Stillo, director of Canada economics at Oxford Economics, stated, “The BoC has been clear that it intends to ease policy only gradually. If inflation fails to slow or house prices rebound too quickly, the BoC may delay further easing and hold the policy rate higher for longer.”
Canada’s economic growth is expected to average 1.0% this year. Nearly 70% of economists in the poll believe the end-2024 overnight rate is more likely to be higher than expected rather than lower, reflecting ongoing uncertainty in the economic landscape .