By Nojoud Al Mallées
The central bank’s interest rate announcement Wednesday comes after Statistics Canada reported that the annual inflation rate fell to 1.6% in September, below the inflation target of 2 % of the Bank of Canada.
Nathan Janzen, deputy chief economist at RBC, said the latest consumer price index report reinforced his expectations of a massive rate cut.
“(You) have an economy that is probably performing worse than necessary to keep inflation under control and interest rates (are) still in restrictive territory. So that makes a pretty simple argument for continuing to cut interest rates,” Janzen said, adding that the central bank needs to lower interest rates to a level that does not hinder economic growth.
After the Bank of Canada cut interest rates last month, Governor Tiff Macklem indicated the central bank would be prepared to cut rates more aggressively if inflation fell too much.
He also said the central bank now wants to see economic growth restart.
The Bank of Canada has lowered its key interest rate three times so far, bringing it down to 4.25%.
The sharp slowdown in inflation this year has somewhat surprised economists who feared that rising prices would take longer to be brought under control.
Today, the Bank of Canada faces the risk that interest rates will slow down economic growth more than desired.
Although the Canadian economy has continued to grow modestly, real gross domestic product per capita has declined for five consecutive quarters.
The labor market also eased considerably, with the unemployment rate in September standing at 6.5%, an increase of one percentage point from the previous year.
The gloomy economic environment, coupled with plummeting inflation, has convinced many forecasters that the Bank of Canada will make massive back-to-back interest rate cuts in October and December, which would bring its benchmark rate back to 3.25 %.
The Parliamentary Budget Officer predicted in his recent economic and fiscal outlook that the central bank would continue to cut rates until its key rate reaches 2.75% in the second quarter of 2025.
Carl Gomez, chief economist at real estate data company CoStar, said real interest rates in Canada – which are adjusted for inflation – are much higher than in other countries, putting pressure on stronger downward pressure on the Canadian economy.
“What’s interesting is that Canada’s real policy rate is still much higher than every other country, but we’re dealing with a much weaker economy in Canada than the United States. So that tells you another reason why the Bank of Canada is so far behind the curve,” Gomez said.
The annual inflation rate in the United States fell to 2.4% in September, while the Federal Reserve’s policy rate is between 4.75 and 5%.
Interest rate cuts from the Bank of Canada are expected to once again stimulate activity in the real estate market, raising fears of a rebound in inflation.
But Gomez said that even though housing listings have increased, demand in the real estate market remains lukewarm.
“The market has become more of a buyer’s market, which continues to drive down property prices; not allowing them to continue to progress as they had before the pandemic,” Gomez said.
Janzen said that while lower interest rates are helping affordability somewhat, housing prices remain too high for many people.
Higher youth unemployment will also likely weigh on housing demand, he said, given that many of them would be potential first-time home buyers.
“Interest rates are falling, but labor markets are also slowing at the same time, so we don’t expect the same kind of increase in housing market activity that one might normally expect if interest rates were falling while the unemployment rate was low,” Janzen said.
In addition to its interest rate announcement, the Bank of Canada will release its quarterly monetary policy report on Wednesday, which will include new economic forecasts.
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Last modification: October 20, 2024