Most economists now expect the Bank of Canada to cut its overnight rate by 25 basis points on September 17, with a Reuters poll showing consensus that weak job numbers and a slowing economy gave policymakers little alternative.
Nearly 80% of economists surveyed by Reuters between September 9 and 12 forecast a quarter-point reduction to 2.50%, with most anticipating at least one more cut before year-end.
Such a move would mark the Bank's first reduction for months, having kept its benchmark rate on hold over the summer as it weighed up the inflation outlook and threats to the economy posed by US president Donald Trump's trade war.
That recent pause halted a cycle that saw it bring rates 225 basis points lower. But signs that the economy is weakening appear to have tilted the balance in favour of a cut next week: in August, the economy lost 65,500 jobs, pushing unemployment to its highest level in nine years outside the pandemic. Last quarter, GDP shrank by 1.6% due to U.S. tariffs on key exports, adding to calls for more rate cuts and weakening the Canadian dollar.
Inflation and global context weigh on decision
The Bank’s next move will also depend on inflation data due just a day before the decision. “The BoC also has the next set of inflation data to mull over, due the day before its announcement. Should there be further progress in the headline number – and any softening among the core metrics – that will further seal the deal for a cut,” Penelope Graham of Ratehub.ca said.
Canada’s overall inflation remains below the Bank of Canada’s 2% target, but core inflation is a bit higher. Graham warned that while another rate cut is possible in 2025 if the economy stays weak, the Bank is unlikely to move too quickly because core inflation is still elevated.
Desjardins Group economist Royce Mendes argued that inflation worries have been overstated by temporary factors, suggesting “it’s really time to move the inflation worries to the back burner and start focusing…on supporting the economy, with the unemployment rate near 7%.” Mendes flagged that markets may be underestimating the scope of future BoC cuts.
Market impact and borrower strategies
The anticipation of a rate cut has already pushed down bond yields and mortgage rates. “The growing pressure on the US Federal Reserve to cut rates has caused bond yields to drop, including north of the border; the Government of Canada five-year yield is now in the 2.7% range for the first time since May. This has put downward pressure on fixed m
Mortgage rates, with the lowest five-year term in Canada back below the 4% threshold,” Graham said.
Investment banking giant Morgan Stanley predicts Federal Reserve to have four straight 25-basis-point rate cuts at each of its three remaining meetings this year and once more in January.
With mortgage rates easing and home prices stagnant, buyers are seeing improved affordability. According to Ratehub.ca’s calculator, a homeowner with a 10% down payment on a $672,784 home and a 5-year variable rate of 3.95% would see their monthly payment drop by $84 if the Bank of Canada implements a 25-basis point cut, equivalent to a savings of $1,008 per year.
CMP
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