Bank of Canada poised to cut rates again in widely anticipated move

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The Bank of Canada is widely expected to cut interest rates for the third consecutive time on Wednesday and continue its process of bringing down borrowing costs.

Economists and investors are nearly unanimous in predicting the central bank will lower its benchmark interest rate by a quarter percentage point to 4.25 per cent, followed by several more reductions over this year and 2025.

Inflation is drawing closer to the bank’s 2-per-cent target, unemployment is rising and per-capita consumption is on the decline – all arguments in favour of lower interest rates.

Moreover, the U.S. Federal Reserve is nearing the start of its own rate-cutting cycle, easing some pressure on the Bank of Canada for taking a divergent path from its American counterpart.

While Wednesday’s decision could be anticlimactic, financial analysts will be looking for any signs of how fast – and deep – the BoC cuts rates in the coming months, including the potential for larger moves.

“Clearly their rates should be lower than where they are now, and the bank’s moving slowly and surely in that direction,” said Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal.

At the previous rate announcement, in July, Bank of Canada Governor Tiff Macklem said the central bank’s governing council was putting more emphasis on “downside risks” in its deliberations.

“We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2-per-cent target,” he explained.

This shift in communications has bolstered predictions that the bank will not be taking a pause from lowering rates any time soon. Interest-rate swaps, which capture market expectations of monetary policy, are pricing in six quarter-point cuts by June or July of next year, according to Bloomberg data. That would take the benchmark interest rate to 3 per cent.

Investors also expect the Federal Reserve to begin a series of rate cuts at its Sept. 18 meeting. Those views were reinforced by Fed chair Jerome Powell’s recent speech at the Jackson Hole economic conference. “The time has come for policy to adjust,” he said.

Economic conditions in Canada have been tepid for several quarters. Demand has softened as consumers and businesses contend with more onerous borrowing rates, and the unemployment rate has risen to 6.4 per cent – nearly two percentage points higher than a record low set two summers ago.

This is helping to tamp down inflation. The annual rate of Consumer Price Index growth was 2.5 per cent in July – the lowest reading in more than three years. Inflation has resided within the Bank of Canada’s control band of 1 per cent to 3 per cent for seven consecutive months.

“The focus now is on the labour market and the pace of economic growth,” said Royce Mendes, head of macro strategy at Desjardins Securities. “Inflation is really now more of a back-burner issue.”

Despite the weakness, Canada has managed to avoid an economic downturn. However, strong population growth is helping to prop up the numbers, such as aggregate gross domestic product. This is masking a decline in GDP per capita, a popular measure of a country’s living standards.

“You could make a reasonable argument that the economy’s performed much worse than the headline numbers suggest,” Mr. Reitzes said.

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. Still, there’s a major risk to the consumption outlook: mortgage renewals. Even with the central bank in cutting mode, many homeowners will be renewing their mortgages at higher interest rates than in 2020 and 2021, resulting in heftier payments.

“It’s a big reason as to why the Bank of Canada needed to begin this rate-cutting cycle early and needs to get rates down before the mortgage renewal wall hits in April, 2025 – five years after rates basically fell to zero,” Mr. Mendes said.

The Desjardins strategist said he’ll be parsing Mr. Macklem’s comments on Wednesday for any signs the BoC could cut rates by half a percentage point at future meetings, although he’s not yet convinced this will happen.

However, if the labour market deteriorates to a significant degree, and with other central banks also easing monetary policy, “the bank will be more comfortable going with something larger than a [quarter-point cut] if that’s what’s needed,” he said.