Bollywood Fever: The Bank of Canada (BoC) is widely expected to cut its key overnight rate on Wednesday for the second time in as many months. This decision comes after recent data indicated a further easing of consumer price inflation, restrained spending, and a lackluster economic outlook.
Last month, the BoC trimmed its policy interest rate by 25 basis points to 4.75%, following a period of maintaining it at its highest level in over two decades. This move marked the first rate cut in four years, making the BoC the first Group of Seven central bank to reduce rates since the pandemic began.
A Reuters poll conducted from July 16 to July 19 showed that nearly three-quarters of economists surveyed anticipated a further cut in the policy rate to 4.50% this week.
“A rate cut is likely to be delivered,” said Taylor Schleich, a rates strategist at the National Bank of Canada. He also expects the central bank to reiterate its message that future cuts will be based on incoming data.
BoC Governor Tiff Macklem emphasized that any future rate reductions would be contingent on economic data. Financial markets currently see almost a 91% chance of a rate cut this week, with expectations for a total reduction of 75 basis points in borrowing costs by the end of the year.
The BoC will announce its monetary policy decision on July 24 at 9:45 a.m. ET (1345 GMT), alongside the release of the quarterly Monetary Policy Report, which will include updated forecasts for 2024 economic growth and inflation. Economists expect these forecasts to be lower than previous projections.
Inflation slowed more than expected to 2.7% in June, with the BoC’s core inflation measures also easing slightly, strengthening the case for another rate cut. Despite this, inflation remains near the upper limit of the bank’s target range of 1%-3%.
Economists are concerned that consumer prices are not declining quickly enough to allow the BoC to be aggressive in stimulating the economy. “They’re probably going to acknowledge lingering inflation risks,” Schleich noted.
While Canada’s economic growth has been positive this year, it has not been particularly robust. Rising unemployment has highlighted economic constraints and fears of a potential recession. Much of the growth has been attributed to an immigration-led increase in population rather than inherent economic strength. In its April Monetary Policy Report, the BoC estimated growth in 2024 to be 1.5% and 2.2% in 2025.
“Things are very weak, particularly on a per capita basis,” said Randall Bartlett, senior director of Canadian economics with Desjardins Group.
A recent BoC survey found that business investment willingness is below average due to a weak demand outlook. Additionally, the rate-sensitive housing sector has not seen a pickup in demand, and retail sales data showed a decline in consumer spending in May, with a likely further decline in June.
Despite the persistent economic weakness, the BoC is expected to be cautious in making further rate cuts. “The Bank of Canada will be very gradual in taking its foot off the brake,” Bartlett remarked.
As the BoC navigates these economic challenges, its upcoming decisions will be closely watched by economists and investors alike, who are keen to see how the central bank balances inflation control with the need to support economic growth.
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