The Bank of Canada is expected to deliver a dose of interest rate relief Wednesday when economists and market watchers predict the central bank will cut its overnight lending rate.
The central bank began its easing cycle in June when it reduced the overnight rate by 25 basis points to 4.75 per cent, the first cut in more than four years.
The last change before that to the overnight rate happened on July 12, 2023, when the bank increased the overnight rate by 25 basis points to five per cent.
The director and senior economist at BMO Sal Guatieri said tomorrow鈥檚 rate cut is widely expected by markets.
"It just seems like all the stars are aligning for rate cuts," Guatieri said. "We know after the last rate reduction six weeks ago, the Bank of Canada basically told us that they are planning a series of rate reductions, albeit they will take it one meeting at a time.鈥"
In June, Bank of Canada governor Tiff Macklem said there was enough evidence that underlying inflation was easing at a sustainable level. However, he warned that the risks to the inflation outlook remained including geopolitical tensions, and rising house prices.
"If we lower our policy interest rate too quickly, we could jeopardize the progress we鈥檝e made," Macklem said at the time. "Further progress in bringing down inflation is likely uneven and risks remain."
Since that decision, inflation has come down to 2.7 per cent after it increased to 2.9 per cent in May. The economy is also showing signs of slowdown with job creation slower today than it was six months ago, unemployment is ticking up and economists say there are signs of overall consumer stress, including deteriorating credit quality.
Guatieri says that since the meeting in June, everything has moved in the direction of warranting another rate cut.
"The key core measures of inflation are tucked under three per cent, and most importantly for the Bank of Canada, there is every reason to believe inflation will just keep on falling," he said.
The Bank of Canada was the first central bank to cut rates ahead of its peers at the Bank of England, the European Central Bank and the United States Federal Reserve. The vice-president at the Conference Board of Canada, Michael Burt, says that how quickly rates come down from here on out will depend, at least in part, on what those banks do.
"If the fed in the United States is not cutting rates, it's really going to slow down how quickly the Bank of Canada is cutting rates because they don鈥檛 want to have too much divergence from what is happening in the United States and the rest of the world," Burt said.
The Bank of Canada makes eight interest rate decisions every year and many economists predict at least one or two more cuts will be announced by year's end. The next rate decision is scheduled for Sept. 4.
"We are looking at measured declines rather than bigger drops because it would signal that there is a lot more concerns if they went for a larger increase," Burt said. "There is still a long way to go as we think neutral would be about 2.75 per cent, so you are still looking at 200 basis points for interest rates to fall over the next 12-18 months."
An MNP Consumer Debt Index survey conducted and released by Ipsos Monday found that two-thirds of respondents said they desperately needed interest rates to go down, with more than half saying they are concerned rates may not fall fast enough to help them out financially.
If the central bank cuts rates tomorrow as expected, the cost of borrowing will get cheaper and individuals with variable or adjustable rate mortgages will feel the impact almost immediately.
"It鈥檚 good news across the board for borrowers but the impact will be slow and steady on the way down," said Ratehub.ca鈥檚 mortgage expert Penelope Graham.
Graham says she will be looking closely at what kind of long-term outlook Macklem provides and what insight or language he uses to describe how soon the central bank intends to cut rates again. The language there, she says, could impact the bond market and ultimately fixed rate mortgages.
"If the bank seems very dovish, if they are giving us more hints to when we could potentially see more cuts, the frequency, how many more, that could get the bond market moving a little lower," she said. "That could set the stage for lower fixed rate mortgages."
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