Bank of Canada Contemplated Postponing Interest Rate Decrease Until July

June 20, 2024 TruthUSA

The Bank of Canada considered delaying its benchmark interest rate cut until July but ultimately decided to make the change this month due to positive inflation reports, as stated in the newly released bank summary.

On June 5, Canada’s central bank announced a reduction in its key rate from 5 percent to 4.75 percent, marking the first cut since March 2020.

Governor Tiff Macklem mentioned that Canada had made significant progress in combatting inflation. However, a newly released summary of deliberations implies that the decision was not straightforward.

The summary reveals that the bank’s governing council analyzed the risks of cutting rates too early versus waiting too long.

Members of the council had varying perspectives on the risks associated with the decision, with some emphasizing downside risks to inflation due to a weak economy and the effects of tight monetary policy, while others considered upside risks related to wage growth and a potential housing market rebound.

The council contemplated waiting for additional monthly Consumer Price Index (CPI) data to ensure before implementing a rate cut in July, according to the summary.

Rate Cut Impacts

Although the rate cut signifies the beginning of an easing cycle for the Bank of Canada, experts suggest that a single cut will not have a significant impact on the economy or affordability. However, the housing market is expected to rebound following a noticeable slowdown in recent months.

According to the Royal Bank of Canada (RBC), the rate reduction is unlikely to directly affect mortgage costs immediately. Still, it could motivate prospective buyers as economic confidence grows. The bank noted that many mortgage holders renewing in the next six to 12 months may experience higher rates compared to their current terms.

The summary mentioned the potential for the rate cut to revitalize the housing market and highlighted the impact of population growth on housing, the economy, and inflation.

Ottawa’s plan to limit temporary residents in Canada to 5 percent of the total population could influence inflation and growth forecasts, as per the summary.

Despite the bank’s cautious approach to future cuts, TD Bank forecasts another rate reduction sooner rather than later.

TD economist James Orlando stated in a note to investors that they anticipate two more rate cuts in 2024, followed by a continued cutting cycle in 2025.

The Bank of Canada will weigh two additional inflation reports before its next interest rate decision on July 24.

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