Markets are betting on Bank of Canada’s second rate cut this week

Economists and market watchers are betting the Bank of Canada will make another interest rate cut this week amid growing evidence that inflation is on a steady decline.

Expectations that the bank will cut its key interest rate at its scheduled meeting this Wednesday have been high since Statistics Canada’s latest inflation report was released last week, which showed annual inflation fell to 2.7 per cent in June.

The inflation reading came in below expectations of 2.8% and helped bolster market confidence that the Bank of Canada may be ready for a second rate cut on top of last month’s 0.25% cut.

“I think it’s very likely that the Bank of Canada will cut rates again this week. From a strategic perspective, it wouldn’t really make sense to cut rates by just 25 basis points and then leave them there and see how the economy reacts, because that wouldn’t really make a significant difference in the path of the economy or inflation.” noted Royce Mendez, managing director of Desjardins.

“So it always made sense that the Bank of Canada would more often than not make at least two rate cuts in a row before pausing. And now the latest data has only strengthened this trend.”

Last month’s interest rate cut, which dropped the central bank’s key rate to 4.75 percent from five percent, was the first in more than four years.

In addition to the latest inflation report, Mendes said recent data showing rising unemployment as well as subdued growth expectations for Canadian businesses support the prospect of another cut.

While inflation remains above the Bank of Canada’s two per cent target, Mendes said he believes further delay could have negative consequences.

Statistics Canada’s latest retail sales report last Friday showed Canadians cut their spending in May as retail sales fell 0.8 per cent to $66.1 billion.

Sales were lower in eight of the nine subsectors tracked, the agency said.

“What the Bank of Canada is trying to do is simply reduce the amount of restrictions that it puts on the economy. It’s not trying to stimulate the economy, it’s just trying to reduce the number of obstacles that it creates,” Mendez said, adding that a second rate cut could make Canadian consumers feel more confident about their spending again.

The most recent Canadian labor market data shows the economy stalled in June, losing 1,400 jobs, while the unemployment rate rose to 6.4 percent from 6.2 percent in May.

The June result was the highest unemployment rate since January 2022, another indicator that raises the prospect of a Bank of Canada rate cut this week.