The Bank of Canada is expected to lower its key rate — which influences interest rates in the country — once again on Wednesday, according to most analysts. An additional breath of fresh air that is eagerly awaited by borrowers.
After maintaining its key rate at 5% for many months, the Bank of Canada finally lowered it twice, in June and July, each time by a quarter of a percentage point, to bring it to 4.5%.
“We expect a third decrease in a row, which would bring the key rate to 4.25%,” says Jimmy Jean, chief economist at Mouvement Desjardins. A projection shared by most of the country’s economic and financial institutions.
The CD Howe Institute’s Monetary Policy Council is no exception. In a note released last Thursday, almost all of its members called for another quarter-percentage-point rate cut in September. They then recommend that the Bank of Canada lower it to 4% at the next rate announcement in October and to 3% in a year, by September 2025.
Controlled inflation, but a weak economy
The Bank of Canada’s restrictive monetary policy has allowed it to get the upper hand on inflation. According to the latest data from Statistics Canada, in July, the consumer price index — which measures the change in the cost of living — was up 2.5% on an annual basis in the country.
Inflation has been within the Bank of Canada’s target range of 1% to 3% for seven months now. But the brakes on inflation have not been without their bumps.
“On the surface, it’s an economy that’s doing well, and has even recorded interesting growth. [de 2,1 %] in the second quarter. But when you really look under the hood, there are some pretty obvious signs of weakness,” notes Jimmy Jean of Desjardins.
In particular, household consumption growth stood at 0.6% in the second quarter compared to the previous one, a “very low” level, he said.
“And when we look at this indicator per capita, it’s even worse. It’s a fifth consecutive quarter of contraction. It shows that the Canadian consumer is clearly under pressure,” adds the expert.
Matthieu Arseneau, deputy chief economist at the National Bank, also notes that “government spending temporarily boosted Canadian economic activity” in the second quarter.
“However, high interest rates have a very negative impact on private sector economic growth, particularly in recent months,” he argues.
Unemployment likely to continue to rise
On the job market, the picture could darken over the coming months, estimates Matthieu Arseneau.
“We have been protected in recent months because businesses have been a little traumatized by the labour shortage. That means they have been reluctant to lay off employees. But that could change, and then the unemployment rate could rise,” he said.
As of July, Canada’s unemployment rate stood at 6.8%, an increase of 0.9 percentage points compared to the same period a year earlier.
Young people are particularly affected. The unemployment rate for 15-24 year-olds has reached 14.5%, an increase of three percentage points.
“We think that the Bank of Canada could have started to lower rates a little earlier. But it still has the opportunity to redeem itself by decreeing rate cuts more substantial than 0.25 percentage points,” argues Jimmy Jean.
Matthieu Arseneau also believes that “more significant rate cuts will be needed during the next meetings of the Bank of Canada” in order to avoid the negative effects on the economy of maintaining interest rates at a high level for a prolonged period.