The Bank of Canada cut its overnight lending rate, which impacts interest rates charged for mortgages and other loans, for the third time, bringing interest rates down to 4.25%. The 25-basis-point cut was widely expected by Bay Street and follows similar cuts in June and July.
The September 5 interest rate cut represents the third time since the 2009 global financial crisis that the Bank of Canada has cut interest rates three consecutive times. And it probably won’t be the last.
What Is Canada’s Interest Rate?
Economists expect the Bank of Canada to make additional cuts this year. Right now, there is a 93% chance of a 25-basis point (0.25%) cut in October with another rate cut fully priced in for December. Two additional 25-basis point cuts this year would take interest rates down to 3.75%.
Some believe that weaker-than-expected economic data could force the Bank of Canada to announce larger 50-basis point cuts. In fact, economists at CIBC believe the recent 25-basis point cut was perhaps too conservative and that the central bank needs to make larger cuts to get the Canadian economy moving again.
Are Deeper Interest Rate Cuts On The Table?
There is certainly some evidence backing up a 50-basis point interest rate. Canada’s gross domestic product (GDP) data inched up 0.2% in May following a 0.3% increase in April. Economists expect June’s data to show a gain of just 0.1%. Preliminary data meanwhile points to weaker economic activity in June and July.
Moreover, the Bank of Canada said additional cuts would be coming should inflation continue to get closer to the central bank’s 2% target. According to Statistics Canada, inflation rose 2.5% in July, which was the lowest level in 40 months and the slowest pace since March 2021.
The Bank of Canada will announce its next interest rate decision when it meets next on October 23. Should inflation, GDP data, and other growth figures come in weaker than expected, we could see the Bank of Canada announce a larger-than-expected interest rate cut. Regardless of how fast rate cuts come, it is widely expected that the overnight lending rate will hit 2.5% in 2025.
And frankly, the more interest rate cuts the better. The Canadian economy may be resilient but with GDP hovering at zero, it certainly isn’t strong. And, if you remove the country’s recent population growth, the Canadian economy would be registering a -2.4% annual rate. The Bank of Canada needs to do everything it can to help reignite the Canadian economy. And that could be deeper interest rate cuts.
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