BoC Set to Implement Major Rate Cut Amid Below-Target Inflation

Forecasters are anticipating that the Bank of Canada will accelerate the pace of interest rate cuts and reduce its policy rate by half a percentage point this week.

The central bank’s interest rate announcement on Wednesday follows a report from Statistics Canada indicating that the annual inflation rate dropped to 1.6 percent in September, below the Bank of Canada’s two percent target.

Nathan Janzen, an assistant chief economist at RBC, stated that the latest consumer price index report supports his expectation for a significant rate cut.

Following the Bank of Canada’s rate cut last month, Governor Tiff Macklem indicated that the central bank is prepared to cut rates more aggressively if inflation decreases too much.

He also expressed the central bank’s desire to see economic growth rebound.

The Bank of Canada has already lowered its key interest rate three times, bringing it down to 4.25 percent.

The sharp decline in inflation this year has surprised economists, who were concerned that price growth might take longer to stabilize.

Currently, the Bank of Canada faces the possibility that interest rates could actually hinder economic growth more than intended.

While the Canadian economy has continued to grow modestly, real GDP per capita has declined for five consecutive quarters.

The job market has also softened significantly, with the unemployment rate reaching 6.5 percent in September, up one percentage point from the previous year.

Many forecasters believe that the Bank of Canada will implement consecutive large interest rate cuts in both October and December, potentially reducing its policy rate to 3.25 percent.

According to the parliamentary budget officer, the central bank is expected to keep cutting rates until the policy rate reaches 2.75 percent in the second quarter of 2025.

Carl Gomez, chief economist at real estate data company CoStar, highlighted that real interest rates in Canada are considerably higher than in other countries, adding more pressure to the Canadian economy.

He noted that the U.S. annual inflation rate dropped to 2.4 percent in September, with the Federal Reserve’s policy rate ranging from 4.75 to five percent.

Despite expectations that the Bank of Canada’s rate cuts would revive the housing market, concerns about inflation rebounding have emerged.

Gomez explained that while home listings have increased, demand in the housing market remains weak.

Lower interest rates may improve affordability to some extent, but home prices are still out of reach for many individuals, especially with higher unemployment rates among younger people impacting housing demand.

Janzen emphasized that falling interest rates and softening labor markets may not lead to the expected surge in housing market activity, as economic conditions are not as favorable as in the past.

In addition to the interest rate announcement, the Bank of Canada will release its quarterly monetary policy report on Wednesday, providing updated economic forecasts.