Recent Rate Cuts and Economic Context

On June 5th, the BoC cut its key interest rate by 25 basis points to 4.75%, marking the first reduction in what has been one of the most aggressive rate hiking cycles in recent memory. This move was largely driven by a softer job market and easing inflation pressures. The unemployment rate rose to 6.2% in May, and the employment rate fell to its lowest level since late 20211. These indicators suggest a cooling labour market, which typically supports the case for lower interest rates. However, the decision to cut rates further is not straightforward. The BoC has emphasized that future decisions will be made “one meeting at a time,” reflecting the uncertainty and complexity of the current economic environment.

Factors Supporting Additional Rate Cuts

Several factors support the argument for additional rate cuts on July 24th:

Inflation Trends

Inflation remains a critical concern for the BoC. Although inflation ticked up to 2.9% in May, it is still within the central bank’s target range. However, wage growth, which accelerated to 5.4% in June, poses a potential risk. Higher wages can lead to increased consumer spending, which might drive inflation higher. The BoC will need to balance these inflationary pressures against the need to support economic growth.

Housing Market Dynamics

The Canadian housing market has shown signs of cooling, with sales down by double digits in many cities compared to a year ago. This slowdown is partly due to the previous rate hikes, which have made borrowing more expensive. However, the recent rate cut in June has not led to a significant resurgence in housing activity. If the BoC decides to cut rates again, it could provide some relief to homebuyers and potentially stabilize the housing market.

Global Economic Conditions

Global economic conditions also play a crucial role in the BoC’s policy decisions. The U.S. Federal Reserve’s actions, in particular, are closely watched. While the Fed has held its rates steady, any future rate cuts by the Fed could influence the BoC’s decisions. Additionally, global economic uncertainties, such as trade tensions and geopolitical risks, could prompt the BoC to adopt a more accommodative stance to safeguard the Canadian economy.

Obstacles to Further Rate Cuts

Despite the supportive factors, there are also significant obstacles to further rate cuts:

Wage Growth

One of the main concerns is wage growth. While the labour market has softened, wage growth remains robust, with average hourly wages accelerating to 5.4% in June. High wage growth can lead to increased consumer spending and higher inflation, which could deter the BoC from cutting rates further.

Housing Market Stability 

The housing market is another critical factor. Although the market has shown signs of stability, any significant changes could impact the BoC’s decision. A stable housing market is essential for overall economic stability, and the BoC will be cautious about any actions that could disrupt this balance.

Canadian Dollar

The value of the Canadian dollar is also a consideration. A significant depreciation of the loonie could lead to higher import prices and increased inflationary pressures. The BoC will need to balance the benefits of lower rates with the potential risks to the currency.

Expert Opinions and Predictions

Economists and market analysts are divided on the likelihood of additional rate cuts. Some, like Marc Desormeaux from Fédération des caisses Desjardins du Québec, believe that the BoC will cut rates again in July, citing the softening labour market and easing inflation. Others, however, are more cautious, pointing to the risks associated with wage growth and the housing market. 

Douglas Porter, chief economist at BMO Capital Markets, highlights the mixed signals from the economy. While the labour market data supports the case for a rate cut, the persistent wage growth remains a concern. Similarly, the team at BofA Global Research expects a 25 basis point cut on July 24th, with the rate potentially reaching 3.75% by the end of the year.

Cashin Mortgage Perspective

From the perspective of Cashin Mortgage, a leading mortgage brokerage, the potential for additional rate cuts presents both opportunities and challenges. On one hand, lower rates could spur demand for mortgages, as homebuyers seek to take advantage of more affordable borrowing costs. On the other hand, the brokerage must navigate the complexities of a dynamic interest rate environment, ensuring that clients receive the best possible advice and mortgage products tailored to their needs.

Conclusion

As the July 24th meeting approaches, all eyes will be on the BoC and its decision on interest rates. While there are compelling arguments for further rate cuts, the central bank must carefully weigh the risks and benefits. For Canadians, particularly those in the housing market, the outcome of this meeting could have far-reaching implications. Whether the BoC opts for additional easing or holds steady, the decision will undoubtedly shape the economic landscape in the months to come.

What are your thoughts on the potential rate cuts? Do you think the BoC will move forward with another reduction, or will they hold steady?