Will the Bank of Canada Cut Interest Rates This Year?

The big question on everyone’s lips seems to be, will the Bank of Canada cut interest rates this year? The Bank has raised the benchmark interest rate by nearly 500 basis points since early 2022 in its quest to vanquish inflation in the Canadian economy.

In July, the central bank pulled the trigger on a quarter-point rate hike following a temporary pause this past spring. There had been some optimism that the institution would be pausing its tightening cycle and perhaps even planning to slash interest rates as inflation metrics continue to slow. However, the Governing Council noted that stronger-than-expected consumption, tight labour markets, and rising energy prices forced policymakers to raise rates again.

This, of course, has seeped into the Canadian real estate market. According to Statistics Canada, the Canada Mortgage and Housing Corporation’s average five-year mortgage lending rate rose to 5.99 per cent in July, the highest since December 2008.

Should Canadians brace for another rate increase this year? It appears so, as the mission-accomplished victory for inflation might be short-lived, economists warn.

In July, the annual consumer price index (CPI) increased by 3.3 per cent, up from 2.8 per cent in June. Core inflation, which strips the volatile energy and food components from the report, rose 0.6 per cent month-over-month. Furthermore, the core CPI remained at 3.2 per cent year-over-year.

Market experts also anticipate another jump in consumer prices in August due to climbing energy costs, which have sweeping effects across the economy.

Since the end of June, crude oil and natural gas prices have been rising on growing tightness concerns. Global oil markets are expected to slide into a supply deficit in the year’s second half, potentially lifting West Texas Intermediate (WTI) and Brent prices to nearly $90 a barrel.

As a result, the futures market is penciling in a 25-basis-point rate hike at the September policy meeting. Of course, more data will emerge heading into the much-anticipated meeting, including gross domestic product (GDP), retail sales, producer prices, and housing prices. So, a lot could happen.

Will the Bank of Canada Cut Interest Rates This Year?

Canadian financial markets are no longer planning to see rate cuts in 2023.

According to a survey of market participants published by the BoC in July, senior economists and strategists believe the central bank will keep interest rates at a more than two-decade high until the end of the year. Industry experts think the institution will only start cutting rates in March.

The same survey also suggested that the economy will expand by 0.7 per cent by the end of 2023, up from the previous estimate of a 0.1 per cent contraction. While below-trend growth might be the new normal for the next couple of years, the figures point to an economy that averts a recession.

The Bank of Canada thinks it will take longer to return inflation to its two per cent target because of a healthy labour market and excess demand in the broader economy. Meanwhile, economists purport that the generally healthy economic landscape will give the central bank some more wiggle room to keep raising rates or leave them higher for longer.

“It’s going to be a long period of what would be considered elevated interest rates,” David Dodge, senior advisor at Bennett Jones and former Bank of Canada governor, told BNN Bloomberg in a recent interview. “It’s going to be a long period of what would be considered elevated interest rates. What it will require (disinflation) is continued— rather elevated— interest rates right through 2024, right into 2025.”

Meanwhile, the central bank understands concerns that it could raise rates at a level that could break the economy. In fact, according to a summary of deliberations, the BoC realizes that it is not trying to raise rates more than it has to, as policymakers understand the risks associated with higher interest rates.

“If policy is not restrictive enough to bring inflation to target on a reasonable timetable, there is a risk that rates will have to be increased by even more later. If policy is simply taking longer to work … over-tightening risks making economic conditions more painful than necessary,” the summary stated.

Ultimately, recent forecasts suggest that inflation will hover around the three per cent mark over the next year. It might not ease to the two per cent threshold until the middle of 2025, proving that the fight against rampant inflation is not over and the hard work has just begun.

Sorry, everyone, do not anticipate lower borrowing costs this year.