Canada has been working to lower its inflation rate for years, and among its measures is the Bank of Canada (BoC) maintaining or raising high overnight interest rates. However, the tides are now finally turning.
Inflation has been slowing down this year, and the BoC has announced two rate cuts so far. The next central bank announcement is expected on September 4, and many signs — domestic and international — point to continued reductions in the key interest rate.
On Tuesday morning, Statistics Canada published the July Consumer Price Index, showing that inflation had decelerated to 2.5%, down from 2.7% in June. This makes further BoC rate cuts all the more likely.
This is the closest we’ve been to our 2% target rate in years.
In March 2021, a year after the pandemic first shook the Canadian economy, the CPI stood at 2.2% and increased to 3.4% the following month. Since then, the rate has either mostly gone up or slowed slightly for a short period.
Statistics Canada
After six consecutive rate holds, the BoC lowered its key interest rate to 4.75% in its fourth update of the year on June 5.
Recent slowing inflation in Canada and the US led to experts correctly predicting the lowering of interest rates since both countries are so deeply tied together. As such, economic patterns in the US have historically replicated themselves in Canada.
Soon after, the June Consumer Price Index (CPI) was released in the US, showing that inflation had slowed to 3%. On July 24, hopes of a rate cut turned into a reality, and the Bank decreased its rate by another 25 basis points, bringing it to 4.5%.
The US released July CPI on August 14, showing that inflation has slowed to 2.9%.
Combined with July’s 2.5% CPI in Canada, there is an even stronger expectation that this trend will hold up again, bringing another BoC rate decrease on September 4 and beyond.
Penelope Graham, mortgage expert at Ratehub.ca, shared her insights with Daily Hive.
Lester Balajadia/Shutterstock
“July’s CPI report indicates Canadian headline inflation is slowing as anticipated, while the core measures — key indicators tracked by the Bank of Canada — have also dropped on a monthly basis,” she said in an email. “While further central bank rate cuts are already largely baked in, this further establishes the path for the BoC’s cutting cycle, and certainly another quarter-point cut to come on September 4.”
Graham added that a key takeaway from the July CPI report is that mortgage interest costs continue to ease, dipping to 21% from 22.3% in June. She noted that this reflects the cumulative effect of the BoC’s last two rate cuts, which have lowered the cost of borrowing for many mortgage shoppers.
“Five-year Government of Canada bond yields have hovered in the 2.9% range in recent weeks and remained stable on this morning’s inflation news, as the decrease to CPI was largely expected. However, this continues to put downward pressure on fixed mortgage rates,” the expert continued.
Even though interest rate cuts are promising and have renewed hopes for many aspiring homebuyers, the question remains: will they be enough? A recent Ipsos survey showed that it’ll take more than rate cuts to fix Canada’s grim debt outlook.
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