The Bank of Canada is expected to lower its key interest rate again this Wednesday, following slower inflation. The reason behind this is weak consumer spending and a sluggish economy. Last month, the bank cut the rate by 25 basis points to 4.75%, its first reduction in four years, making it the first major central bank since the pandemic. Taylor Schleich, a National Bank of Canada strategist, believes another cut is likely, depending on new economic data. Financial markets predict a 93% chance of a rate cut this week, with rates potentially dropping by 75 basis points this year.
Inflation slowed more than expected to 2.7% in June, with core inflation measures also easing slightly, supporting the case for another rate cut. However, inflation remains near the upper end of the BoC’s 1%-3% target range.
Economists have expressed concerns that consumer prices are not decreasing quickly enough to allow the bank to take aggressive measures to boost the economy. Schleich noted that the BoC would likely acknowledge lingering inflation risks. Although Canada’s economic growth has been positive this year, it remains weak. Rising unemployment has further highlighted economic constraints and fears of a recession.
Most growth has been driven by population increases due to immigration rather than any inherent economic strength. In its April Monetary Policy Report, the BoC projected growth of 1.5% for 2024 and 2.2% for 2025. Randall Bartlett, senior director of Canadian economics with Desjardins Group, pointed out that economic conditions are particularly weak on a per capita basis.
A recent BoC survey revealed below-average business investment willingness due to weak demand outlooks. The rate-sensitive housing sector has not experienced increased demand, and retail sales data showed consumer spending contracted in May, with expectations of further declines in June. According to Avery Shenfeld, an economist at CIBC, the Canadian economy is slowing, and factors such as mortgage renewals may exacerbate future challenges.
Despite the weak economy, the Bank of Canada (BoC) is unlikely to lower interest rates by more than 25 basis points at a time. The Bank of Canada aims for a “soft landing,” in which the economy slows enough to reduce inflation without causing significant job losses. As long as inflation continues to fall, the Bank of Canada will cut interest rates cautiously. Economists predict the rate will fall from 4.75% to 4.5% this week, and possibly to 3% by next year.
The BoC faces the challenge of balancing inflation risks with economic vulnerabilities. While the labor market is loosening and inflation expectations are subdued, the bank must carefully navigate the path of rate cuts to avoid reigniting inflation or destabilizing the housing market.
