After six consecutive rate holds, the Bank of Canada (BoC) lowered its key interest rate to 4.75% in its fourth update of the year on June 5.
This marked the BoC’s first rate cut in over four years. Before the most recent cut, it had maintained a 5% rate since July 2023.
“With continued evidence that underlying inflation is easing, the Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points,” the Bank said in a release following its last announcement. “Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain.”
The Bank of Canada building in Ottawa (Gary A Corcoran Arts / Shutterstock.com)
While the market is mostly split on what’s in store for the next announcement, some experts have been predicting another rate cut on July 24. New US inflation data released on Thursday has strengthened this prediction.
The US Consumer Price Index (CPI) showed that inflation slowed to 3% in June. According to analysts at mortgage brokerage Ratehub.ca, this has renewed expectations of rate cuts in our southern neighbour, which increases the likelihood of the same in Canada.
Penelope Graham, mortgage expert at Ratehub.ca, said these numbers give Canada’s central bank “further reassurance that inflation is trending in the right direction.”
“While the BoC has already made its first rate cut ahead of the US Federal Reserve, the rising likelihood the American central bank will be in the position to do so soon will support further downward movement on rates in Canada without the risk of shocking our currency,” she told Daily Hive in an email.
Graham shared that bond markets are reacting favourably to Thursday’s news, which has put downward pressure on fixed mortgage rates.
“Should this persist into next week, rate shoppers can expect to see additional discounts from lenders on their fixed-rate options,” she added. “Canada’s own June CPI report comes out on July 16. Should this show another downward trend in inflation, it will further bolster the chance of a cut on July 24.”
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In a blog post, the mortgage expert stressed that the Canadian and American economies are very closely intertwined, especially regarding the cost of borrowing.
“Historically, the BoC and the US Federal Reserve have mirrored each other in terms of monetary policy (the act of cutting, holding, or hiking their benchmark interest rates). Because the two countries are such close trading partners, economic trends – such as spiking inflation – tend to affect both similarly,” she noted. “That has certainly been the case following the first few years of the pandemic; as lockdowns were lifted, both countries struggled with supply chain challenges while consumer demand roared back, which drove inflation to record peaks north and south of the border.”
Before the latest US CPI data came out, more doubts about a rate cut floated in the Canadian market because May CPI data (2.9% rise) showed higher numbers than April (2.7% rise).
“This improvement in the US CPI has stoked new optimism that the BoC will be in a cutting mood – and those hopes will only strengthen should we get good news on July 16, when Canada’s own June inflation numbers come out,” Graham said.