The Bank of Canada announced a cut to the Key Rate of .25% at their September 4th Policy Meeting. More great news... financial markets are presently optimistic with some forecasters predicting that, if inflation continues to ease, the BoC may cut the Key Rate at each of the two meetings remaining in 2024.

On August 20th, Stats Can reported that inflation had continued to dip. July inflation dropped to 0.2% month-over-month, translating to 2.5% year-over-year. Great news for interest rate watchers as more signals are lining up with Bank of Canada projections. 

This reflects U.S. pundit predictions that U.S. interest rates will likely be trimmed by the U.S. Federal Reserve on September 18th and it could even be as much as a half-a-percentage point cut. U.S. financial markets have experienced a tumultuous few weeks after U.S. labour statistics showed that job creation was down and unemployment was on the rise.

If cuts proceed as projected, economists here foresee that interest rates could land at 3.75% by the end of 2024, down from the current 4.25%. Plus, if the economy trends on the cooler side, economists expect there could be an additional .5% trim in the first months of next year and the Key Rate could be as low as 2.5% by the end of 2025.

Supporting this view is that Canadian housing markets and job creation didn’t catch fire after the previous two cuts. Right now, there’s a lot of speculation as economists weigh how the BoC will interpret data over the next few months in balance with the perspective of the coming wave of mortgage renewals in 2025.

By all forecasts, the coming 12 months will see sizable interest rate shifts.

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With inflation continuing to head lower, our economy moderately growing, and unemployment numbers edging up, it was no surprise that, on July 24th, the BoC cut the Key Rate by another .25%. Two consecutive cuts now have the Key Rate at 4.5%. 

Surprisingly, in the first week of August, world stock markets rolled down fast, but by the next week were bouncing back up. Now, almost universally, Central Bankers are talking of rates heading lower, faster, as they look to calm and stabilize markets.

Will financial markets level and hold in anticipation of coming rate cuts? Could we see a 3.75% rate by year-end? Maybe. Already one leading Canadian economist is suggesting that there may be a Key Rate cut at each of the next three BoC meetings this year. This would be a welcome relief for households across the country.

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As the Bank of Canada continues to hold its Key Rate, economists continue to dissect the message coming from BoC officials. Statements at the release of the latest policy report reaffirmed the Bank’s outlook that Monetary Policy is working. Total inflation and core inflation have eased in recent months, and the BoC expects inflation to continue to edge closer to the 2% target this year.

However, Governor Tiff Macklem tempered the statement by pointing out that U.S. economic growth, employment, and inflation data continue to surprise decision-makers universally which is likely a reason why the U.S. Fed held its Benchmark Rate on May 1st.

Two areas the BoC is likely watching:
•    If rates are cut prematurely, our economy may wander out of step with our neighbour.
•    If rates are cut too aggressively, our dollar would likely drop against the U.S. greenback.
Either way, it could mean trade growth, an economic boost, but inflationary pressure here at home. Plus, the BoC is likely also considering if lower rates would reignite housing markets across the country. 

You may have noticed that lately the BoC is sharing positive news with a somewhat hawkish perspective, so any move it makes or doesn’t make, won’t surprise financial markets or inadvertently impact the economy. This leaves pundits to ponder… when. The BoC’s April Market Participants Survey shows that, overall, economists see a rate move by September. But, a Reuter’s Poll has the majority of economists surveyed predicting a June cut. 

With ongoing U.S. economic data clouding forecasts and squeezing away some of the Bank of Canada’s wiggle room, we’ll see what the BoC decides next month. We will keep you posted.