Economists are anticipating the Bank of Canada to accelerate its interest rate cuts and reduce its policy rate by 0.5% this week. This move comes in response to Statistics Canada reporting a drop in the annual inflation rate to 1.6% in September, below the central bank’s 2% target.
Nathan Janzen, RBC’s assistant chief economist, stated that the latest consumer price index supports his prediction of a significant rate cut. He emphasized the need to bring interest rates to a level that fosters economic growth without hindering it.
Following the previous rate cut, Governor Tiff Macklem signaled the bank’s readiness for more aggressive rate cuts if inflation continues to decline. He also expressed the bank’s desire to see a resurgence in economic growth.
Canada’s key interest rate has already been reduced three times, reaching 4.25%. The unexpected slowdown in inflation has raised concerns about potential constraints on economic growth resulting from high interest rates.
Despite modest economic growth, the decline in real GDP per capita for five consecutive quarters is worrying. Furthermore, the labor market has weakened significantly, with the unemployment rate climbing to 6.5% in September.
Experts predict that the Bank of Canada will implement substantial rate cuts in both October and December, aiming to reduce the policy rate to 3.25%. The parliamentary budget officer forecasts further rate cuts until the policy rate reaches 2.75% by the second quarter of 2025.
Carl Gomez, chief economist at CoStar, highlighted the disparity between Canada’s real interest rates and those of other countries, suggesting a need for further rate adjustments to support the economy. He noted that Canada’s real policy rate remains higher than other nations, despite weaker economic conditions.
While the U.S. inflation rate dipped to 2.4% in September, the Federal Reserve’s policy rate stands at 4.75-5%. Canada’s interest rate cuts are expected to stimulate the housing market, although subdued demand continues to exert downward pressure on prices.
Lower interest rates have improved affordability to some extent, but high home prices remain a barrier for many buyers. The rise in unemployment, especially among young individuals, is also dampening housing demand.
Despite falling interest rates, the softening labor market is expected to limit the typical surge in housing market activity. This dynamic is further complicated by the current economic conditions.
Alongside the interest rate announcement, the Bank of Canada will release its quarterly monetary policy report on Wednesday, providing updated economic forecasts.
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