Bank of Canada lowers key interest rate to 4.5%, delivering back-to-back cuts (2024)

12:45 p.m.

What’s next?

• The Bank of Canada’s next interest rate announcement is on Sept. 4.
• The U.S. Federal Reserve’s Open Market Committee will meet on July 30 and 31. The Fed rate decision will be announced at the end of the FOMC meeting.
• Statistics Canada will release May GDP numbers on July 31. The next Labour Force Survey numbers will be published on Aug. 9, and the July inflation numbers will be out on Aug. 20.

– Mark Rendell

12:35 p.m.

BoC says it wants growth, as focus shifts to downside risks

Ever since the Bank of Canada began raising interest rates in the spring of 2022, it has been trying to slow down the Canadian economy – making life harder for consumers and businesses for the sake of getting inflation back under control.

Now Governor Tiff Macklem and his team want the economy to grow.

“The ingredients increasingly are in place to bring inflation back to the 2-per-cent target. We don’t need more excess supply. We need growth to start picking up,” he said in the press conference after the rate announcement. “We need job creation to start picking up, to absorb the excess supply in the economy and get inflation sustainably back to target.”

That’s a major shift in tone – and priorities – from the central bank. It remains focused on getting inflation back to 2 per cent. But it’s starting to worry about the economy slowing too much and inflation undershooting the target. That suggests the bank could be increasingly eager to get borrowing costs down relatively quickly.

The Canadian economy has certainly hit a rough patch. GDP growth undershot the central bank’s expectations in the first half of the year as the pent-up demand from the pandemic for vehicles and travel waned and consumers had to put more money toward servicing their debts.

Unemployment has risen to 6.4 per cent from 4.8 per cent two years ago, as job creation has failed to keep pace with population growth. And both business and consumer sentiment remain in the dumps.

The bank expects growth to pick up in the back half of the year, but tellingly, it cited lower borrowing costs as one of the reasons for a rebound.

Mr. Macklem said it’s still appropriate for interest rates to be restrictive, given that inflation remains above the central bank’s target. But after two years of acting as a roadblock to growth, it’s clear the bank wants monetary policy to get back to a more neutral level, likely sooner than later.

– Mark Rendell

12 p.m.

Opinion: The bottom line: Bank of Canada should keep cutting interest rates

When headline inflation increased to 2.9 per cent in May, up from 2.7 per cent in April, there was much speculation that the Bank of Canada would pause its rate cuts. However, it ticked back down to 2.7 per cent in June. That, plus a weakening labour market and stagnating per capita GDP, made it practically certain the bank would cut on Wednesday. It did.

Whether the bank has entered an easing cycle is no longer the question. The only question left is how far and how fast the Bank of Canada continues to cut interest rates.

There are several upside risks to inflation in the near future which could cause the bank to pause its rate cuts. We think it shouldn’t.

Here’s why.

– Jeremy Kronick and Steve Ambler

11:41 a.m.

Falling interest rates mean larger penalties for breaking your fixed-rate mortgage

This second interest rate cut by the Bank of Canada is unlikely to dramatically alter the math for anyone buying a home or renewing their mortgage in the next month or so.

A decrease of another quarter of a percentage point in the central bank’s trendsetting rate will translate into only marginally lower variable mortgage rates. And it’s possible it won’t have much impact at all on the bond market, which influences the level of fixed mortgage rates.

Bond traders expected the Bank of Canada to cut rates in July, so today’s change had already been priced in.

But there’s another aspect of fixed-rate mortgages that homeowners and homebuyers should keep in mind when interest rates are falling: prepayment penalties.

Whatever your reason for wanting to get out of your mortgage early – usually it’s moving, divorce or financial difficulties – your lender will charge you a fee that compensates it for the mortgage interest payments you won’t be paying.

For fixed-rate mortgages penalties are typically the greater of three months’ worth of interest (as for variable-rate mortgages) or what’s known as the “interest rate differential,” or IRD. The latter is calculated taking into account your remaining balance and the difference between your original rate and the rate at which your lender can re-lend the money you’re paying off in advance.

You can probably guess what that means: IRD penalties tend to get larger when interest rate falls, as the difference widens between mortgage rates at the time you took out your mortgage and the rates available to new borrowers.

It’s something to keep in mind if you’re currently shopping for a fixed mortgage rate. The risk of large penalties isn’t in itself an argument against choosing a locked-in rate. But it is a reason to ask lenders how they calculate their IRD penalties.

All of the big banks and some smaller financial institutions use complicated IRD formulas that include calculations based on their posted rates, which are typically much higher than the discounted rates they offer to well-qualified borrowers. This kind of math can artificially widen the interest rate differential and result in very steep charges.

By contrast, many large-volume credit unions and online banks, as well as lenders that focus only on mortgages, are what’s called “fair penalty lenders” that use straightforward, and less pricey, IRDs.

The last time interest rates dropped, at the onset of the pandemic, many homeowners who were forced to break their fixed-rate mortgage were slammed with penalties that reached tens of thousands of dollars in some cases. And those steep charges prevent others from refinancing at lower rates.

While rates aren’t falling nearly as fast now, it’s still a good idea to ask lenders whether they use posted rates in the IRDs.

– Erica Alini

11:07 a.m.

Macklem on the labour market

“What we have seen is that employment is growing more slowly than the labour force is growing. … Businesses in general, on net, they are hiring, but they’re not hiring or creating as many jobs as there are new people entering the labour market. … What it basically means is, if you’re entering the job market, it’s taking longer to find a job.”

“If you look at how that’s affecting workers, it’s not affecting all workers in the same way. It’s particularly affecting new entrants in the labour market. It’s the younger worker who has finished school, has graduated, and is entering the labour market, looking for their first job. It’s taking longer to find that first job. It’s the new immigrant, the new non-permanent resident, that’s entering the country, looking for a first job. It’s taking longer for them to find their first job.”

– Matt Lundy

11:01 a.m.

Macklem on the rate path

“I think I’m pretty clear the expected direction of our policy rate is lower, but we’re not on a predetermined path.”

– Matt Lundy

10:59 a.m.

Macklem on stagflation

“I don’t think 2.7-per-cent inflation is what anybody would call stagflation. We’re within our inflation band of 1 to 3 per cent. … We’re in much more of a situation where we need growth, because there’s considerable excess supply, even as we continue to get inflation coming down towards a 2-per-cent target.”

– Matt Lundy

10:54 a.m.

Macklem on the path for interest rates

“We are equally concerned about being below [the inflation] target as we are about being above target. With the target in sight, it’s more important to balance these upside and downside risks. … The economy is in excess supply. There’s slack in the labour market, and that is acting to pull inflation down. Our assessment is there’s enough excess supply in the economy. The ingredients increasingly are in place to bring inflation back to the 2 per cent target. We don’t need more excess supply. We need growth to start picking up. We need job creation to start picking up, to absorb the excess supply in the economy and get inflation sustainably back to target.”

“If inflation continues to evolve broadly in line with our forecast, it is reasonable to expect further cuts in our policy rate. But we’re not on a predetermined path. We’re going to be taking it one decision at a time.”

– Matt Lundy

10:50 a.m.

Key quotes from Governor Tiff Macklem’s opening statement

What went into the BoC’s decision to cut?

“First, monetary policy is working to ease broad price pressures. Second, with the economy in excess supply and slack in the labour market, the economy has more room to grow without creating inflationary pressures. Third, as inflation gets closer to the 2 per cent target, the risk that inflation comes in higher than expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected.”

Where the BoC thinks inflation is heading

“We expect inflation to moderate further, though progress over the next year will likely be uneven. This forecast reflects the opposing forces affecting inflation. The overall weakness in the economy is pulling inflation down. At the same time, price pressures in shelter and some other services are holding inflation up. We are increasingly confident that the ingredients to bring inflation back to target are in place. But the push-pull of these opposing forces means the decline in inflation will likely be gradual, and there could be setbacks along the way.”

Economic growth has been weak

“Economic growth in Canada has picked up but remains weak relative to population growth. Household spending has been soft. Pent-up demand for things like new cars and travel is fading. And many families are setting aside more of their income for debt payments, leaving less money for discretionary spending. In the labour market, employment has continued to grow more slowly than the labour force.

Growth is expected to pick up

“Looking ahead, economic growth is expected to increase in the second half of 2024 and through 2025. This reflects stronger exports and a recovery in household spending as borrowing costs ease. Business investment is also expected to strengthen as demand picks up, and residential investment is forecast to grow robustly. Overall, with the economy strengthening, excess supply will be absorbed next year and into 2026.”

Risks to inflation remain

“As always, there are risks around our inflation outlook. Globally, geopolitical uncertainty is high. Here in Canada, the biggest downside risk is that household spending could be weaker than expected. On the upside, inflation in shelter and other services could prove more persistent.”

– Mark Rendell

10:38 a.m.

Economists react to Bank of Canada’s rate cut

Here is how some economists on Bay Street reacted to Wednesday’s decision:

Royce Mendes, head of macro strategy at Desjardins Securities:

“Governing Council didn’t provide any explicit guidance about what comes next, but there’s a strong sense that policymakers feel an urgency to continue the rate-cutting cycle in September. The dovish language in the releases paints a picture of officials who are growing more worried about the likelihood of recession. As a result, we are pulling forward our rate-cut expectations to forecast another move in September.”

Avery Shenfeld, chief economist at CIBC Capital Markets:

“While the bank cites a few pockets of inflation, including wages, it also notes that the breadth of inflation has diminished, and one of the sources of pressure is tied to mortgage interest, which will ease as the bank lowers the policy rate. The press conference statement talks about downside risks taking more weight in their deliberations, and the bank is now mentioning risks of inflation dropping too far alongside mentions of those areas that are still seeing price pressures.”

Stephen Brown, deputy chief North America economist at Capital Economics:

8Although the bank will continue to take the “monetary policy decisions one [meeting] at a time”, the new Monetary Policy Report shows that the bank now shares our view that headline inflation will average 2.3 per cent in the third quarter. That provides some support to our forecast that a third consecutive rate cut in September is the most likely outcome at this stage.”

– Matt Lundy

10:33 a.m.

Analysis: BoC and Fed are close to taming inflation without recession – but final stretch is lined with risks

On Wednesday, Bank of Canada Governor Tiff Macklem sounded a bit like his American counterpart Jerome Powell.

As he explained the bank’s second consecutive rate cut, Mr. Macklem pointed to the inherent risks of constraining the economy too much.

“With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations,” he explained in the prepared remarks of his opening statement. “We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2-per-cent target.”

And here was Mr. Powell, the chair of the Federal Reserve, in testimony to U.S. Congress earlier this month: “In light of the progress made both in lowering inflation and in cooling the labour market over the past two years, elevated inflation is not the only risk we face,” he said. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Translation: central bankers are hyper-aware of inflicting too much damage on their already weakening economies, which would dash their hopes of pulling off soft landings.

The situation in Canada is more fragile than in the U.S. The unemployment rate here has risen by 1.6 percentage points from a low two years ago. Consumers are pulling back on purchases and businesses expect a glum year for sales.

The Bank of Canada has intentionally sought to weaken the economy through restrictive interest rates that brought demand and supply into better balance, helping to ease inflationary pressures. The economy has been in excess supply for a while and inflation is firmly below 3 per cent.

But the signs of damage are growing. As Mr. Macklem laid out in his remarks, job seekers are taking longer to find work, and the number of vacancies has tumbled.

The Bank of Canada and the Fed are close to pulling off a remarkable feat – taming inflation without a recession. (The situation in Canada is more grim in per-capita terms.)

But the final stretch is lined with risks. Any missteps could have serious, real-world consequences.

– Matt Lundy

10:19 a.m.

How markets are reacting after today’s Bank of Canada rate cut

Market reaction has been quite muted so far, signalling that traders accurately priced in today’s news well ahead of time.

The Canadian dollar fell about one-10th of a cent, to 72.48 cents US, at last check. The two-year government bond yield is down about four basis points, not far off where it was yielding prior to the 9:45 a.m. ET Bank of Canada announcement.

The U.S. two-year bond yield is also down about four basis points, and came under some slight downward pressure when PMI data was released concurrently south of the border. That PMI report showed that U.S. business activity climbed to a 27-month high in July, but companies appeared to have some difficulty sustaining higher prices for their goods and services amid resistance from consumers. That firmly keeps a possible Fed rate cut in play for September.

The latest interest rate probabilities in swap markets suggest equal odds on whether there will be a further rate cut at the bank’s next meeting on Sept 4 – which represents little change in the market’s view since prior to the BoC announcement.

The swaps market is priced for a Bank of Canada overnight rate of 4.0859 per cent at the end of this year. That’s also little changed from before the BoC announcement, and suggests traders are divided on whether the bank will cut one or two more times this year.

Now attention turns to the BoC press briefing, which could ignite more market moves.

– Darcy Keith

10:16 a.m.

Analysis: How patient do struggling borrowers need to be with falling rates?

The Bank of Canada used a shovel to increase interest rates, while rate cuts have so far been delivered with tweezers. Just how patient do struggling borrowers need to be with falling rates?

Let’s check in with the economics department at some of the big banks for some perspective. The Bank of Canada’s trendsetting overnight was cut by one-quarter of a percentage point Wednesday for the second time this summer and now sits at 4.5 per cent. RBC Economic projects in its July, 2024, forecast that the overnight rate will fall to 4 per cent in the fourth quarter of this year and to 3 per cent by the end of 2025.

As of last week, economists at Bank of Nova Scotia anticipated a 4 per cent overnight rate by the fourth quarter of 2025 and 3.25 per cent by the end of next year. BMO Economics had a similar view for the end of next year, while TD Economics pegged the overnight rate at 4.25 per cent for the fourth quarter of this year and 2.75 per cent for the end of next year. CIBC Economics last month projected 4 per cent at the end of this year and 2.75 per cent at the end of 2025.

Opinion: The latest interest rate cut means it’s time to stop hating on variable-rate mortgages

The contrast with the early days of rate hikes back in 2022 could not be sharper. Perhaps realizing that inflation was running amok, the Bank of Canada increased the overnight rate by a total of four percentage points that year. Included was a summertime blockbuster hike of one percentage point in one go. In all, there were 10 increases in 2022 and 2023 that took the overnight rate to 5 per cent from 0.25 per cent.

So far, we’ve had the overnight rate come down in two minimum increments of 0.25 of a point, with identical declines in the cost of variable-rate mortgages, lines of credit and floating-rate loans. Expect more use of the tweezers rather than the shovel in future rate cuts, unless the economy staggers into a recession.

Borrowers may celebrate bigger rate cuts, but the story they tell will be as unwelcome as those rate hikes by the shovelful in 2022.

– Rob Carrick

10:11 a.m.

Second consecutive BoC rate cut may spur activity in Canada’s real estate market

The second interest rate cut in two months may help spur more activity in the Canadian real estate market. But realtors don’t expect the pace of sales to jump significantly given that borrowing costs remain high and buyer confidence is low.

In announcing that its benchmark interest rate would be a quarter-percentage-point lower at 4.5 per cent, the Bank of Canada said that “household spending, including both consumer purchases and housing, has been weak.”

After the central bank’s first interest rate cut in early June, the real estate industry had expected sales to ramp up after nearly two years of mostly slow activity. But although there was a bump in transactions, it was still well below the 10-year average.

Realtors are now saying there will need to be multiple rate cuts for prospective buyers to wade back into the market.

Buyers still can’t afford to get a large-enough mortgage to buy in places like Southern Ontario and the Greater Vancouver area, even though fixed-rate loans have come down in price.

“From a buyer’s point of view, the interest rate is still relatively high. They want to see if rates drop more before they go forward,” said Kingsley Ma, a vice-president with Re/Max who has worked in residential real estate in the Vancouver region for two decades.

A poll sponsored by Toronto’s real estate board found that there would need to be cumulative rate cuts of at least a full percentage point to ramp up sales.

That would help bring down monthly mortgage payments. It could also boost buyer confidence.

Realtors have reported that buyers in the largest markets of Ontario feel that they can take their time because there is more selection. And other realtors say their clients just simply feel financially squeezed by the higher cost of living.

Meanwhile, the number of homes available for sale keeps on rising. For part of last year, prospective home sellers hung onto their properties for fear that they would not get the price they wanted.

Now, some sellers either have no choice but to sell now or are listing in anticipation that the interest rate cuts will bring out more buyers.

– Rachelle Younglai

9:48 a.m.

Bank of Canada cuts policy rate to 4.5 per cent, strikes more balanced tone

The Bank of Canada lowered its benchmark interest rate for the second consecutive time on Wednesday and said that it is now putting more emphasis on downside risks to economic growth, rather than focusing mainly on the risk of a rebound in inflation.

The widely anticipated move brings the bank’s policy rate to 4.5 per cent from 4.75 per cent. This is the second cut in a long-awaited monetary policy easing cycle, and comes after the bank raised interest rates 10 times in 2022 and 2023 to tackle the most serious bout of inflation in a generation.

Price pressures have eased over the past two years, as global supply chains have improved, economic growth has stalled and restrictive interest rates have curbed consumer spending. That’s led the bank to adopt a more balanced approach to monetary policy in its latest rate decision, teeing up additional interest rate cuts later this year.

“As inflation gets closer to the 2-per-cent target, the risk that inflation comes in higher than expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected,” Bank of Canada Governor Tiff Macklem said, according to the prepared text of his press conference opening statement.

He said that it is “reasonable” to expect additional rate cuts if inflation continues trending lower, as the central bank is forecasting. But he said that the bank’s governing council will be “taking our monetary policy decisions one at a time.”

Read the full story on today’s BoC rate announcement.

– Mark Rendell

9:15 a.m.

BoC and Fed divergence expected to grow

The gap between Canadian and U.S. monetary policy will get larger in the near term if the Bank of Canada moves ahead with further rate cuts while the U.S. Federal Reserve waits on the sidelines.

The Fed, which is dealing with a stronger economy and more stubborn price pressures than its Canadian counterpart, has yet to begin easing monetary policy. The Federal Funds rate is between 5.25 and 5.5 per cent, a level reached last summer, compared with the BoC policy rate of 4.75 per cent. (The Fed uses a range).

Fed chair Jerome Powell has said he’s becoming more confident that inflation is moving in the right direction. But few analysts and traders expect the U.S. central bank to start lowering interest rates at its next decision on July 31. Right now, markets are leaning heavily toward a first rate cut from the Fed in September.

A growing divergence between the BoC and the Fed could put downward pressure on the Canadian-U.S. dollar exchange rate. The exchange rate remained fairly stable after the BoC’s first rate cut last month, but that could change if the gap between the BoC and the Fed gets much bigger.

Governor Tiff Macklem acknowledged last month that there is a limit on how far Canadian monetary policy can get ahead of the Fed. “But we’re not close to those limits,” he said.

– Mark Rendell

8:50 a.m.

A look at Bank of Canada’s business and consumer surveys

Downbeat businesses and consumers expect the Canadian economy to remain in the doldrums and inflation to continue to decline, according to a pair of Bank of Canada surveys published on July 15.

The bank’s quarterly survey of businesses found subdued expectations for future sales, easing cost pressures tied to wages and little interest in hiring or investing in machinery and equipment. This pessimistic view is feeding into how much companies plan to raise prices, as well as their forecasts for inflation.

“Businesses expect the growth of their input prices and selling prices to slow, suggesting that inflation will continue to decline over the coming year,” the Bank of Canada said, noting that most companies now think inflation will be within the bank’s 1-per-cent-to-3-per-cent control range over the next few years.

Individual expectations for near-term inflation also “declined significantly,” according to the bank’s consumer survey, after stalling for several quarters.

The surveys, conducted in late April and May, with follow-ups in June, contain important information for the central bank. Monetary policy makers pay close attention to inflation expectations, as beliefs about prices can become self-fulfilling. They’re also watching for signs of wage pressure and other signals about how businesses are handling the high-interest-rate environment. The bank is purposefully slowing down the Canadian economy with high interest rates in an effort to anchor rising prices.

Read more about the two BoC surveys.

– Mark Rendell

8:15 a.m.

Financial markets put the odds of a BoC cut at around 90 per cent

An interest rate cut on Wednesday is pretty much a done deal, according to financial markets.

Interest rate swap markets, which capture expectations about monetary policy, put the odds of a quarter-point cut at around 90 per cent, according to LSEG Data & Analytics. Bay Street economists are likewise lining up behind a cut, with 22 out of 30 analysts polled by Reuters saying they expect the Bank of Canada to move again this week.

Looking ahead, interest rate swap markets are pricing in a roughly 50 per cent chance the Bank of Canada cuts again at its next rate announcement on Sept. 4. If Mr. Macklem and his team sound dovish on Wednesday, traders will likely up their bets on another consecutive cut. Markets see the central bank lowering the policy rate three times before the end of the year (including this week), which would bring the policy rate to 4 per cent.

– Mark Rendell

7 a.m.

Bank of Canada expected to cut policy rate again

The Bank of Canada began the long-awaited process of lowering interest rates in June. It’s widely expected to follow up with a second quarter-point cut on Wednesday, as inflation moderates and high interest rates weigh on economic activity.

Rate decisions are never a sure thing. But there is a broad consensus on Bay Street that the central bank will lower its policy rate to 4.5 per cent from 4.75 per cent. The key question for analysts and traders is how hawkish or dovish Governor Tiff Macklem and his team will sound and whether they’ll hint at further rate cuts later in the year.

The decision will be announced at 9:45 a.m. ET, followed by a press conference by Mr. Macklem and senior deputy governor Carolyn Rogers at 10:30.

Inflation remains above the bank’s 2-per-cent target, but the trend is looking positive. Annual consumer price index growth has been below 3 per cent for the past six months, down from a peak of 8.1 per cent two years ago. After an upside surprise in May, the inflation rate slowed again in June, falling to 2.7 per cent.

Canadian households and businesses, meanwhile, are struggling with restrictive borrowing costs. Consumers have pulled back on spending, unemployment is rising and businesses are pessimistic about future sales and reluctant to invest. Most macroeconomic indicators show the Canadian economy in a slump and point to a further easing of price pressures.

Alongside its rate decision, the Bank of Canada will publish a new inflation and economic growth forecast in its quarterly Monetary Policy Report.

Having raised interest rates 10 times in 2022 and 2023, the central bank is now reversing course. There’s no question about the direction of travel. It’s a matter of how quickly the BoC wants to get borrowing costs back to a more neutral level. Wednesday’s rate decision – and whatever signals the bank sends – will set the tone for the easing cycle through the back half of the year.

Read more about today’s Bank of Canada announcement.

– Mark Rendell