Bank of Canada Cuts Rates for the Second Time in a Row

In response to moderating inflation and a cooling economy, the Bank of Canada (BoC) cut its overnight rate by 25 basis points for the second consecutive month. The country’s key interest rate now stands at 4.5 per cent, down from its 5 per cent peak.

In the announcement, the BoC said it reduced its rate, in part, because it expects inflation to continue trending towards its annual 2 per cent target ­– it came in at 2.7 per cent in June. It also noted that the economy still has excess supply, meaning that there are more goods and services being offered than there is demand for those products, which should reduce inflation further. “The move was in line with expectations,” says Claire Fan, an economist with RBC.

Inflation hasn’t come down in every category – shelter, restaurants and personal care are still experiencing high price inflation, as these labour-heavy industries have seen wages increase. Still, as Fan explains, “On each of those pressure points, there has been early evidence that inflation’s unwinding.” For instance, she says rent price growth has “ground to a halt” into the summer while rising mortgage interest costs will naturally decline as rates fall.

With inflation cooling, weaker household spending and the unemployment rate rising to 6.4 per cent, up from 5.5 per cent last July, it was no surprise the BoC decided to cut rates again.

Impact on investments

While the BoC decision could provide some relief to the housing market by potentially lowering mortgage rates, the decision could impact investors, too. Past performance doesn’t indicate future performance but generally, a decline in the overnight rate is a positive for investors, says Eric Savoie, an Investment Strategist with RBC Global Asset Management, who spoke with Inspired Investor after the June rate cut.

“Longer duration, fixed-income assets tend to appreciate as rates fall when bond prices go up,” he explained. “For stocks… if the economy avoids a recession, then the lower rates typically help boost stock market valuations, and they deliver pretty good returns in that environment.”

Rate declines can positively impact stocks and bonds in other ways, too. For instance, if people put less on their mortgage, they may have more to spend, which could boost company earnings and, potentially, stock prices. Bond prices move in the opposite direction of yields – when rates fall, bond prices generally rise. 

Where rates go from here

After two rate cuts, the big question now is what will happen next? Eric Lascelles, Managing Director and Chief Economist for RBC Global Asset Management, said in his most recent #MacroMemo report that the market is pricing in a slightly greater than 50 per cent chance of a September rate cut, and then another cut later in the year. “Motivating this,” says Lascelles, “Governor Macklem noted that ‘the downside risks are taking on increased weight in our monetary policy deliberations.’”

The softening of the Canadian economy, lower inflation and rising unemployment validates the Bank of Canada’s rate-cutting decisions, says Lascelles, who adds that there is room for further easing in the months ahead.

RBC itself expects the BoC to cut rates at the next meeting on September 4 and then again on October 23, though more reductions may be needed to get the economy moving again. “Our expectation remains that there will be two additional rate cuts this year,” says Fan. “That will lower the overnight rate to a still restrictive 4 per cent by the end of 2024.”