The Bank of Canada plays a vital role in shaping the country’s monetary policy and determining the appropriate interest rates. As economic conditions develop, the central bank assesses different aspects to make informed decisions.
Well, many people are eagerly awaiting news on whether the Bank of Canada will cut interest rates this year. The central bank has been on a mission to combat inflation in the Canadian economy, raising the benchmark interest rate by almost 500 basis points since early 2022.
In July, the Bank took action with a quarter-point rate hike after a temporary pause during the spring. There was some hope in the air that the bank might hit the pause button on its tightening efforts, or even consider lowering interest rates, given the recent slowdown in inflation metrics.
However, the Governing Council pointed out that unexpected factors like robust consumption, tight labor markets, and increasing energy prices compelled policymakers to continue their rate hikes.
So, the question remains: Will the Bank of Canada cut interest rates this year?
It is a topic that continues to catch the attention of Canadians and investors alike, as the central bank navigates its way through the complex landscape of economic conditions and inflationary pressures.
Bank of Canada's Interest Rate Decisions
The impact of these developments has certainly reverberated throughout the Canadian real estate market. According to Statistics Canada, the average five-year mortgage lending rate from the Canada Mortgage and Housing Corporation (CMHC) reached 5.99% in July, marking the highest level since December 2008.
The pressing question on many Canadians’ minds is whether they should brace themselves for another interest rate increase later this year. It appears that this might indeed be the case, as economists caution that the apparent victory against inflation could be short-lived.
In July, the annual consumer price index (CPI) saw a notable increase, rising to 3.3% from 2.8% in June. Core inflation, which excludes the volatile energy and food components, also increased by 0.6% month-over-month. Additionally, the core CPI remained at a high 3.2% year-over-year.
Market experts are also anticipating another uptick in consumer prices for August, primarily driven by the surging energy costs, which have far-reaching effects on the broader economy.
Since the end of June, both crude oil and natural gas prices have been steadily rising, raising concerns about supply constraints. It is projected that global oil markets may enter a supply deficit in the second half of the year, potentially pushing West Texas Intermediate (WTI) and Brent prices to nearly $90 a barrel.
In light of these developments, the futures market is already factoring in a 25-basis-point rate hike at the upcoming September policy meeting. However, it’s important to keep in mind that there will be more data emerging as we approach this highly anticipated meeting, including figures on gross domestic product (GDP), retail sales, producer prices, and housing prices.
Therefore, the economic landscape remains fluid, and a lot could still change before any final decisions are made. Canadians will need to stay vigilant and adapt to the evolving economic conditions in the months ahead.
The Canadian Economy and the Possibility of Interest Rate Reductions
Recent developments in the Canadian financial markets indicate a shift in expectations for interest rates in 2023. According to a survey conducted by the Bank of Canada and published in July, senior economists and strategists now believe that the central bank will maintain interest rates at a level not seen in more than two decades until the end of the year. Market experts anticipate that rate cuts may only begin in March.
The same survey also suggests a more optimistic outlook for the Canadian economy, with expectations that it will expand by 0.7% by the end of 2023, up from the previous estimate of a 0.1%t contraction. While below-trend growth might be the new norm for the next couple of years, these figures indicate an economy that is likely to avoid a recession.
The Bank of Canada’s view is that it will take longer to return inflation to its target of two percent due to a robust labor market and excess demand in the broader economy. In contrast, economists argue that the generally healthy economic landscape will give the central bank more room to continue raising rates or maintain higher rates for an extended period.
David Dodge, a senior advisor at Bennett Jones and former Bank of Canada governor, emphasized in a recent interview that it will be an extended period of elevated interest rates. He suggested that this would be required to combat disinflation effectively and that these elevated rates could continue through 2024 and into 2025.
However, it’s worth noting that the Bank of Canada is mindful of the potential risks associated with raising rates too aggressively and potentially harming the economy. The central bank’s policymakers understand the importance of finding the right balance, as over-tightening could make economic conditions more painful than necessary.
In terms of inflation, recent forecasts indicate that it will hover around the three percent mark over the next year and may not ease to the two percent target until the middle of 2025. This suggests that the battle against inflation is far from over, and policymakers will need to carefully navigate the economic landscape in the coming years.