New US inflation data "ensures" a BoC interest rate cut in September: expert
The Bank of Canada (BoC) has already cut its overnight rate twice this year, and another rate cut is firmly expected in September.
After six consecutive rate holds, the BoC lowered its key interest rate to 4.75% in its fourth update of the year on June 5.
Soon after, the June Consumer Price Index (CPI) was released in the US, showing that inflation had slowed to 3%.
Analysts at mortgage brokerage Ratehub.ca told Daily Hive that this had renewed expectations of rate cuts in our southern neighbour, which increased the likelihood of the same in Canada.
In a blog post, the brokerage’s mortgage expert, Penelope Graham, stressed that the Canadian and American economies are very closely intertwined, especially regarding the cost of borrowing.
“Historically, the BoC and the US Federal Reserve have mirrored each other in terms of monetary policy (the act of cutting, holding, or hiking their benchmark interest rates). Because the two countries are such close trading partners, economic trends – such as spiking inflation – tend to affect both similarly,” she noted. “That has certainly been the case following the first few years of the pandemic; as lockdowns were lifted, both countries struggled with supply chain challenges while consumer demand roared back, which drove inflation to record peaks north and south of the border.”
On July 24, hopes of a rate cut turned into a reality, and the Bank decreased its rate by another 25 basis points, bringing it to 4.5%.
There is a solid expectation that this trend will hold up again, bringing another BoC rate decrease on September 4.
The US released July CPI on Wednesday, August 14, showing that inflation has slowed to 2.9%.
“July has been a tumultuous month so far for American economic data, but the latest CPI numbers came right in on consensus, with the headline number falling to 2.9%. This marks further progress in the US Federal Reserve’s fight against inflation and ensures a quarter-point rate cut come September,” Graham said in an email to Daily Hive.
“That inflation declined in line with expectations also lowers the chance of a heftier half-point cut, which was speculated upon following last Monday’s stock market event,” she added.
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Graham said Canada’s five-year government bond yield has been in the 2.9% range since last week’s market event—a low not seen since last June.
The yield has remained stable, as Wednesday’s US CPI announcement contained no surprises. However, the expert noted that “downward pressure persists on fixed mortgage rates.”
She shared that a steady rate cut path has been established for the US Federal Reserve. This supports the rationale for the BoC to continue its cutting cycle, with “firm expectations” of another quarter-point rate cut on September 4.
“It also opens the door for more cuts to come later this year and in 2025. This week, several of Canada’s big banks updated their central bank rate forecasts to reflect this,” Graham concluded.
Even though interest rate cuts are promising and have renewed hopes for many aspiring homebuyers, the question remains: will they be enough? A recent Ipsos survey showed that it’ll take more than rate cuts to fix Canada’s grim debt outlook.
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