The Bank of Canada is set to decide whether to cut, hold or increase interest rates on Wednesday — and a growing number of economists say they are anticipating a cut.
“We think that the Bank of Canada should and will cut interest rates again next week,” said Andrew Grantham, executive director and senior economist at CIBC.
“Recent data hasn’t been particularly threatening from an inflation point of view, and so we think that the Bank of Canada has room to respond to the signs of a slowing in the economy.”
The Bank of Canada’s upcoming decision comes after several rounds of economic data released over the summer that suggest the economy and labour market are weakening.
That includes the third straight drop in gross domestic product in June, and recent consumer price index reports that show inflation appears to be stabilizing within the central bank’s one to three per cent target range, which aims to keep inflation increases low and stable.
“We believe they’re (the Bank of Canada is) going to cut rates Wednesday, and we could see a couple of more cuts this year if the data does not pan out the way the bank was expecting,” principal economist Andrew DiCapua at the Canadian Chamber of Commerce said.
The Labour Market Survey for August also showed that unemployment rose to more than seven per cent, which economists say will likely factor into the Bank of Canada’s assessments. This was as the trade war led many business owners to reduce their workforce or freeze hiring due to higher costs from tariffs.
“The Bank of Canada was expecting a (GDP) contraction in Q2 — that was no surprise to them. I think what is more surprising is that the unemployment rate has continued to increase as we’ve gone into Q3,” Grantham said.
“A higher unemployment rate, that would typically mean lower inflationary pressures the longer term because people may not be comfortable spending as much money. It might have a disinflationary impact longer term.”
What kind of cut are economists eyeing?
Grantham and other economists who spoke with Global News are predicting the Bank of Canada will cut rates on Sept. 17 by 25 basis points, which would bring its benchmark from 2.75 per cent to 2.5 per cent — with potentially more to come after.
If there is a cut on Wednesday and a cut in October, that would likely bring interest rates down to what Grantham said economists describe as a “neutral level.”
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“We do need to stimulate the economy, we do need to lower the unemployment rate and to get rid of this, what economists like to call ‘slack’ within the Canadian economy,” he said.
The last time the Bank of Canada brought down borrowing costs was in March, when its benchmark overnight rate was lowered from three per cent to 2.75 per cent, which it has maintained since.
How do interest rates impact you?
Interest rate policy determines the floor on which commercial banks and other lenders base their own borrowing costs for their customers.
This may include a mortgage or business loan from one of the big Canadian banks, or an auto loan from a car dealership.
When the Bank of Canada changes its overnight benchmark, lenders will typically change the rates given to customers and clients as well.
For those who are applying for such loans or have variable-rate contracts, the amount they end up paying can change depending on the timing of the central bank’s policy decision.
In the real estate market, potential homebuyers may hold off on applying for a mortgage if the expectations are high that the Bank of Canada may change its base interest rate soon. This is because for many potential homeowners, the amount they can afford could change as a result of these policy shifts.
The Bank of Canada’s mandate is to maintain stability and balance in the economy, which it does mainly by adjusting monetary policy, or interest rates, as needed.
If rates are very low, it may be easier and cheaper for some businesses and consumers to borrow money, but it can also mean higher inflation because of higher prices for goods and services.
Conversely, if rates are too high, inflation typically drops but economic growth slows because money becomes less affordable to borrow, and this can even lead to job losses.
The summer economic data and the upcoming rate decision all come against the backdrop of the trade war with the United States, sparked by President Donald Trump’s tariff policies.
Prime Minister Mark Carney is still working to reach a trade and security deal with the U.S. in a bid to get tariffs removed, but Canada still faces 35 per cent tariffs plus multiple tariffs on key sectors.
“What that uncertainty means is that when businesses make decisions, and when consumers make decisions because of that headwind of uncertainty, we will need a lower interest rate to achieve the same level of growth that we would do without that uncertainty,” Grantham said.
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