BANK OF CANADA delivers another 0.25% cut, signals further cuts to come!

The Bank of Canada cut interest rates by a quarter percentage point (0.25%) for the second time in a row at is meeting on July 24 and signaled further monetary easing as inflation concerns ease.

The Bank’s management, led by Governor Tiff Macklem, cut its overnight benchmark rate to 4.5%, as markets and economists had expected in Bloomberg polls. Officials noted that sluggish growth continues to cool inflation, and they are now more concerned about possible economic problems.

Macklem confirmed that it was “reasonable” to expect interest rates to fall further and that the bank would take its decisions “one at a time”, refuting expectations that the bank was on a fixed path downward.

Overall, the central bank appears more confident that price pressures are under control and is increasingly focusing on scenarios for avoiding a sharp collapse and maintaining soft landing trends for the economy. This not-so-optimistic tone of the statement suggests that the governing council has shifted its focus from controlling rising inflation to ensuring that inflation remains significantly below the 2% target.

The balance of risks is also changing. Officials cited weaker-than-expected household spending as the main downside risk, pointing to a coming wave of mortgage renewals as a threat to consumption growth. In a statement, the bank said it was seeing more “signs of stagnation” in the labor market and noted that job seekers were taking longer to find work.

In June, the Bank of Canada became the first G7 central bank to cut interest rates. Since then, the European Central Bank has also begun easing policy. It is important to note that markets and economists are increasingly convinced that the US Federal Reserve will also begin cutting rates soon.

“Overall, the Bank of Canada continues to say that it is “reasonable to expect further cuts,” suggesting a continued decline in inflation. We now see this as the default scenario – to cut interest rates if there are unexpected surprises on the inflation front,” said Dominique Lapointe, director of macro strategy at Manulife.

“Coupled with a careful move towards a soft landing for the economy, we now expect the Bank of Canada to cut rates at every remaining meeting this year, leaving the overnight rate at 3.75% in December 2024,” Lapointe said.

Let us remind you that this year there are 3 Bank meetings left – September 4, October 23 and December 11.

Faster rate cuts could allow Bank management to get ahead of the coming wave of mortgage renewals, reducing the payment shock for homeowners who signed up for historically rock-bottom mortgage rates during the pandemic. However, cutting too quickly could lead to a resumption of skyrocketing prices or a new overstretch of the country’s housing market.

Following the Bank of Canada’s key rate cut, large commercial banks announced on the same day that they were cutting their prime lending rates.

All six major banks, including RBC, TD, BMO, Scotiabank, CIBC and National Bank, cut their Prime rates to 6.70% from 6.95%, as did Laurentian Bank and Desjardins.

Prime rates help determine interest rates on adjustable rate mortgages and various lines of credit.

The Bank of Canada’s next scheduled meeting is September 4.