Markets anticipate second Bank of Canada interest rate cut this week

Economists and market watchers are predicting the Bank of Canada will implement another interest rate cut this week due to growing evidence of easing inflation.

Since the release of the latest Statistics Canada inflation report last week, which showed a decrease in annual inflation to 2.7 percent in June, expectations for a lower overnight lending rate announcement on July 24 have been high.

The inflation data was lower than the 2.8 percent anticipated by markets, leading to increased confidence in the possibility of a second rate cut by the Bank of Canada, following the 25-basis-point cut announced last month.

Royce Mendes, Desjardins’ managing director and head of macro strategy, stated, “It’s very likely the Bank of Canada will cut rates again next week. It wouldn’t make strategic sense to only cut rates by 25 basis points and then leave them unchanged to observe the economic response, as this would not significantly alter the economy or inflation trajectory.”

Mr. Mendes further explained that recent data supports the view that the Bank of Canada is likely to implement at least two consecutive rate cuts before pausing.

Notably, last month’s interest rate cut was the first in over four years, reducing the central bank’s key rate from five to 4.75 percent.

Mr. Mendes highlighted that recent data such as increasing unemployment and subdued growth expectations from Canadian businesses further support the likelihood of another rate cut.

Although inflation remains above the Bank of Canada’s two percent target, delaying the rate cut could have negative consequences.

Should the Bank of Canada choose not to cut rates next week, it could signal a greater willingness to push the economy towards a recession in order to marginally decrease inflation.

The latest Statistics Canada report on retail sales in July revealed a decline in May’s spending, with sales dropping by 0.8 percent.