The Bank of Canada (BoC Rate Cut) is widely anticipated to announce another 25 basis point interest rate cut at its policy meeting today, July 24, 2024. This would mark the second consecutive rate reduction by the central bank, following a similar cut in June that brought the benchmark overnight rate down to 4.75%.
Second Consecutive Rate Cut
The expected move comes as inflation in Canada has been moderating in recent months. While still above the Bank of Canada's 2% target, the annual consumer price index growth has held below 3% so far this year. The latest inflation data for June, which showed a slowdown to 2.7%, has bolstered the case for further monetary easing.
In addition to the encouraging inflation figures, the Canadian economy has exhibited signs of cooling, with rising unemployment and subdued business sentiment. This has given the Bank of Canada more confidence that economic conditions are conducive to additional interest rate cuts without risking a resurgence in price pressures.
Implications for the Economy and Borrowers
The anticipated rate cut is expected to provide some relief to debt-burdened Canadians, particularly those with variable-rate mortgages that are directly impacted by changes in the central bank's policy rate.
However, the extent of the benefit may be limited for fixed-rate mortgage holders, who make up the majority of borrowers in Canada.
While lower interest rates can improve housing affordability for new buyers in the near term, experts caution that rate cuts alone may not be sufficient to spur an immediate rebound in Canada's economy. The lagged effects of the Bank of Canada's aggressive rate hikes in 2022 and 2023 are still working their way through the system, weighing on consumer spending and business investment.
Furthermore, structural factors such as high household debt levels and regulatory inefficiencies continue to pose headwinds to economic growth in Canada. Addressing these long-term challenges will likely require a broader policy response beyond monetary stimulus.
Looking Ahead
Assuming the Bank of Canada proceeds with the expected 25 basis point cut today, attention will turn to the central bank's forward guidance and the path of interest rates going forward.
Many analysts anticipate additional rate cuts in the coming months, with markets pricing in a further 50-75 basis points of easing by year-end.
However, the pace and magnitude of future rate cuts will depend on the evolution of economic data, particularly inflation and labor market indicators. The Bank of Canada will also have to navigate the divergence in monetary policy stances among major central banks, with the U.S. Federal Reserve expected to keep rates on hold for longer.
