Bank of Canada Cuts Interest Rates for the Second Straight Time to 4.5%

In late July, the Bank of Canada announced that it was cutting its key policy interest rate for a second straight time and hinted that more cuts were coming should inflation continue to edge lower.

The central bank reduced its overnight lending rate target by 25 basis points to 4.50%, taking it down to levels last seen in June 2023. This comes on the heels of June’s 25-point basis cut to 4.75%, the first interest rate cut in more than four years.

What Are Interest Rates in Canada?

Inflation has slowed significantly over the last two years with rising interest rates cutting into consumer spending and bringing inflation down. The Bank of Canada began raising interest rates in March 2022; since then, inflation has fallen from a June 2022 peak of 8.1% to 2.7% this past June.

In prepared remarks, the Bank of Canada Governor Tiff Macklen said the decision to lower interest rates was based on economic data. The central bank noted three separate times in its July 24^th press statement that the economy is operating in a state of “excess supply.”

Inflation softens when supply is above demand. And, according to the central bank’s own forecasts, the Canadian economy is expected to stay in a state of excess capacity until at least 2026. This could result in both inflation and interest rates falling more than what the markets expect.

Are More Interest Rate Cuts Expected in 2024?

Should inflation ease over the coming quarter, Macklen says we can expect more rate cuts.

“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate,” Macklem said. “The timing will depend on how we see these opposing forces place out.”

How many more interest rate cuts can Canadians expect to see in 2024? Economists and the country’s biggest banks, including the Bank of Nova Scotia, say the Bank of Canada could cut rates as many as four times by the end of the year. This would take interest rates down to 4% with more rate cuts expected in 2025.

Just how far could interest rates fall? Based on gross domestic product (GDP) estimates, Canada’s unemployment rate could hit 8% over the coming years before settling at 5.7%. To avoid a recession, the Bank of Canada could be forced to reduce interest rates to around 2%.

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