Bank of Canada delivers third straight interest rate cut, bringing policy rate down to 4.25 per cent

Canada's biggest banks reduced their prime rates Wednesday afternoon after the Bank of Canada cut interest rates for the third consecutive time.

RBC, BMO, TD, Scotiabank and CIBC each lowered their prime rates by 25 basis points, from 6.7 per cent to 6.45 per cent. The new rates are effective Sept. 5.

The prime rate is the annual interest rate that banks and financial institutions use to set interest rates for variable-rate mortgages, lines of credit, and some other loans.

RBC Royal Bank decreased its prime rate by 25 basis points following the Bank of Canada's rate cut, bringing it to 6.45 per cent from 6.7 per cent. The new rate is effective Sept. 5.

The other major banks are expected to follow suit.

The latest real estate data out of Vancouver are underlining a broader unenthusiastic mood among Canadian would-be homebuyers, even as interest rates have begun to fall.

Sales in August dropped 17.1 per cent from a year earlier, according to Greater Vancouver Realtors figures cited by the Canadian Press. Home prices have largely held, with average prices dropping just under one per cent from a year ago and 0.1 per cent from July.

Greater Vancouver Realtors' director of economics and data analytics Andrew Lis said buyers remained in a “holding pattern,” largely unmoved by the first two BoC cuts in June and July of this year.

Randall Bartlett, economist, Desjardins

Expectations for 2024: Cuts of 25 bps at both October and December meetings

Forecast for 2025: “Six more in 2025,” bringing the overnight rate to 2.25 per cent.

Taylor Schleich & Warren Lovely, economists, National Bank of Canada

Expectations for 2024: “Continued 25 basis points cuts at each of the remaining meetings in 2024.”

Forecast for 2025: Cuts should continue “likely well into 2025 too.”

Douglas Porter, chief economist, BMO

Expectations for 2024: “For now, we look for the Bank to cut rates to 3.5% by January.” (Note there is another BoC announcement scheduled for January 29, 2025.)

Forecast for 2025: “… to 3.0% by next June, but the risks tilt to the Bank going faster than that, and potentially further.”

Avery Shenfeld, chief economist, CIBC

Expectations for 2024: “For now, we’re calling for two more 25 bp moves this year…”

Forecast for 2025: “… enroute to a roughly 2.5 per cent overnight rate next year, but a disappointment in upcoming jobs data could still compel a bolder pace of easing, as could the need for a significant forecast downgrade in the October MPR.”

Claire Fan, economist, RBC

Expectations for 2024: Another cut in October and "a pause this coming December and next January."

Forecast for 2025: "Four consecutive rate cuts" after the January pause, with the overnight rate "lowered to three per cent by the end of Q3 next year."

James Orlando, economist, TD

Expectations for 2024 and 2025: “We have another 175 bps in cuts cued up through next year,” which would bring the overnight rate to 2.5 per cent.

It will take at least two more rate cuts before housing market activity picks up “beyond a superficial uptick,” John Lusink, president of Right at Home Realty, said in a note to Yahoo Finance Canada.

Despite a growing inventory, the homes available are “not matching what buyers are looking for,” Lusink wrote. He expects slightly more action in the fall, but not at the pace of recent years.

“There is ample opportunity in the condo segment, but single-family homes are few and far between, particularly as older homeowners are reluctant to downsize in these market conditions. As a result, home ownership is still out of reach for many.”

CIBC Capital Markets chief economist Avery Shenfeld noted that the statement and opening remarks issued alongside the Bank of Canada rate cut on Wednesday "were mostly a recitation of publicly available facts."

"That contrasted somewhat with some prior meetings, in which the press conference statement gave some insights into what the Governing Council deliberated over in terms of the policy decision," Shenfeld wrote in a research note. Both the statement and opening remarks were more brief than the ones given alongside the Bank's July decision.

"This blander approach might have been influenced by a desire to keep their cards closer to their chest ahead of employment data and a Fed rate decision in upcoming days. By the time they release the summary of deliberations on September 18th, they might be prepared to give more insights into their thinking."

Randall Bartlett, Desjardins’ senior director of Canadian economics, says language in today’s announcement indicates “the Bank may be estimating more slack in the Canadian economy than it had been assuming in July.”

Desjardins’ own tracking shows annualized real GDP growth for Q3 2024 coming in at around half the 2.8 per cent forecast in the BoC’s July 2024 Monetary Policy Report. “Indeed, we’re of the view that the economy is likely to underperform the Bank’s optimistic July outlook,” Bartlett writes, with Desjardins’ projections for CPI and GDP below the BoC’s through next year.

As such, Desjardins is maintaining its forecast for the overnight rate from its August 2024 outlook, projecting two 25 bp cuts this year and six more in 2025, bringing the policy rate down to 2.25 per cent by the end of next year.

Bank of Canada Governor Tiff Macklem has left the door open to 50 basis point rate cuts, according to experts, who point to more dovish language from the central banker.

“If we need to, we are ready to take a bigger step,” Macklem said on Wednesday,” but only, “if the economy was significantly weaker, and if inflation was significantly weaker than expected.”

The BoC delivered its third-consecutive 25 basis point cut to its policy rate on Wednesday.

Capital Economics North America economist Stephen Brown said that Macklem’s emphasis on the need to “increasingly” guard against the risk that Canada’s economy becomes too weak is a more dovish tone than the June and July rate decisions.

“That emphasis on the downside risks leaves the door open to a larger 50bp cut at some point during this loosening cycle,” Brown said.

CPA Canada chief economist David-Alexandre Brassard sees the BoC as less concerned now that rising wages could cause inflation to reaccelerate.

“The Bank of Canada is truly focused on reducing the impact of restrictive monetary policy, given the surprising performance of the economy in the second quarter did not stop it from cutting rates,” he said. “We shouldn’t be surprised if the current interest rate-easing cycle proves faster than expected.”

National Bank of Canada economists Taylor Schleich & Warren Lovely noted the similarity of language in the BoC announcements today and on July 24, highlighting Macklem’s line that it is “reasonable” to expect further cuts and the continued emphasis on downside risk.

“At the margin,” they write, “there appears to be a bit more confidence on the inflation outlook as shelter prices are seen as ‘starting to slow.’”

What stood out, the economists wrote, was the BoC’s assertion that they “need” growth to pick up, and tone and language that imply a cut larger than 25 bps is possible. “​​That’s appropriate in our view given the balance of risks in the labour market and on the growth outlook,” Schleich and Lovely write.

National Bank projects cuts at the BoC’s final two meetings of 2024 “and likely well into 2025 too.”

The Toronto Stock Exchange rose slightly on Wednesday after the Bank of Canada cut its benchmark interest rate for the third time in a row.

As of 11:31 a.m. ET, the Toronto Stock Exchange's S&P/TSX Composite Index was up 46.80 points, or 0.2 per cent, at 23,089.25.

According to Reuters, at least ten sectors on the TSX logged gains, led by the healthcare sector, which rose 1.44 per cent. The rate-sensitive real estate sector gained 1.4 per cent, while capped communications sector added 1 per cent.

The Bank of Canada flagged high shelter costs as the top contributor to overall inflation as it cut its benchmark lending rate on Wednesday.

Governor Tiff Macklem told reporters that prices in this essential category, which includes items like rent and home repair, are beginning to ease. However, he clarified this does necessarily mean houses will become more affordable.

"Shelter inflation is still much too high, but it looks like it is starting to roll over. It is starting to come down," Macklem said. "I'm not saying that that means house prices are coming down. House prices could well actually pick up a bit, with overall inflation in shelter price still coming down."

Discussing Canada’s recent rapid population growth, deputy governor Carolyn Rogers acknowledged that “the surge in population has had a big effect on the Canadian economy.”

She noted that while that growth helped take the pressure off a hot labour market a few years ago, the dynamics have since changed.

“Where we're at now is the Canadian economy is at a point where it's having trouble absorbing the number of workers into the job rate,” she said.

“So, we haven't seen a big increase in unemployment, but we have seen vacancies come down, and we are seeing the unemployment rate tick up a bit. So it will be important that that influx of labour supply starts to match our ability to absorb it.”

Reading between the lines of Tiff Macklem’s speech, BMO chief economist Douglas Porter says that concern about the job market has become pronounced at the BoC, and that “persistent solid wage growth may be the single biggest factor keeping the Bank from being even more aggressive.”

Porter sees hints that the BoC could make a deeper cut in the months ahead, but says the expectation is for more 25 bps cuts “into early next year,” with the overnight rate at 3.5 per cent by January 2025 andthree per cent by June. However, he says “the risks tilt to the Bank going faster than that, and potentially further.”

The Bank of Canada's third consecutive quarter-point rate cut on Wednesday reflects a "cautious approach," according to CIBC chief economist Avery Shenfeld.

"It’s said that victory goes to the bold, but the Bank of Canada went with the more cautious approach of yet another quarter-point rate cut, leaving rates still well above where they will have to head to get the economy really moving again, now that inflation is less of a threat," he wrote in a research note on Wednesday.

However, Shenfeld says weak incoming economic data could prompt swifter cuts from the central bank.

"For now, we’re calling for two more 25 bps moves this year, en route to a roughly 2.5 per cent overnight rate next year," he added.

"But a disappointment in upcoming jobs data could still compel a bolder pace of easing."

There are now signs that the BoC will need to play catch-up in the months ahead, TD Economics senior economist James Orlando writes. Last week’s GDP numbers suggest that “the central bank’s growth outlook for 2024 Q3 looks like a fantasy,” Orlando writes, and “risks are mounting that the BoC is behind the curve.”

TD expects another 175 bps in cuts by the end of 2025, Orlando says, with the 4.25 per cent overnight rate still “significantly restrictive” and unemployment figures weighing alongside the weak GDP print.

“While the pace of cuts (25 bps per meeting) seems entrenched at the moment, the BoC has a long way to go to get monetary policy in line with the state of the economy.”

Canada’s housing market will be little-changed by Wednesday’s 25 basis point cut from the Bank of Canada, according to mortgage and real estate experts.

“Housing sales have remained sluggish all year, and this rate decrease is unlikely to be enough to bring housing market activity back to normal levels,” said Leah Zlatkin, a licensed mortgage broker and expert commentator for LowestRates.ca. “The overnight rate only immediately impacts adjustable variable rate mortgages. The vast majority of mortgages that Canadians hold are fixed-rate mortgages, which follow the bond market.”

Victor Tran, a mortgage and real estate expert at RATES.CA, says a “significant decrease” in borrowing costs is needed to revive housing activity.

“It’s going to take more time,” Tran said. “Even a drop of a full percentage point from current mortgage rates would not result in a significant increase in buying power given persistently high home prices.”

Phil Soper, president and CEO of Royal LePage, says pent up demand could push up prices, if the Bank of Canada continues to lower its trend-setting rate.

“Once the backlog of sidelined buyers is released into the market, pent-up demand will drive prices higher,” he said.

Today’s cut will help with housing starts, but interest rates need to fall further to head off Canada’s housing crisis, says Adrian Rocca, CEO of rental property developer Fitzrovia. At present, he says the situation is on track to get worse.

“At current levels, we are facing an even larger scarcity of supply two to three years from now,” Rocca said in a statement emailed to Yahoo Finance Canada.

Today’s cut will reduce costs and make financing more accessible, Rocca says, but new builds are still not at the levels of previous levels, and “for us to accelerate and the industry as a whole to build at the pace required to actually address the housing crisis, we need to see even lower interest rates and more government incentives to catalyze housing starts.”

For the second decision in a row, Governor Tiff Macklem highlighted the “push and pull of opposing forces” on inflation.

In a prepared opening statement, Macklem said that overall weakness in the economy is pulling inflation down, while price pressures in shelter and some other services are holding it up.

“As outlined in our July forecast, inflation is expected to ease further in the months ahead. It may bump up later in the year as base-year effects unwind, and there is a risk that the upward forces on inflation could be stronger than expected,” Macklem said.

“At the same time, with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.”

Still, Macklem said if inflation continues to ease broadly in line with the bank's forecasts, it is reasonable to expect further interest rate cuts.

On employment:

“The unemployment rate has risen over the last year to 6.4% in June and July. The rise is concentrated in youth and newcomers to Canada, who are finding it more difficult to get a job. Business layoffs remain moderate, but hiring has been weak. The slack in the labour market is expected to slow wage growth, which remains elevated relative to productivity.”

On forecasts for inflation:

“As outlined in our July forecast, inflation is expected to ease further in the months ahead. It may bump up later in the year as base-year effects unwind, and there is a risk that the upward forces on inflation could be stronger than expected. At the same time, with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.”

On the inflation target:

“We care as much about inflation being below the target as we do above. The economy functions well when inflation is around 2%.”

On housing:

“With the share of CPI components growing above 3% now around its historical norm, there is little evidence of broad-based price pressures. But shelter price inflation is still too high. It remains the biggest contributor to overall inflation, despite some early signs of easing.”

On future cuts:

“If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.”

The Bank of Canada highlighted a continued easing in broad inflationary pressures as the central bank reduced its policy interest rate by a further 25 basis points, for the third consecutive time.

“Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up,” the Bank of Canada said in a written statement on Wednesday.

“Governing Council is carefully assessing these opposing forces on inflation.”

The central bank said future rate decisions will be guided by incoming data and the impact of that data on the inflation outlook.

Here are the latest data the Bank of Canada has to guide its interest rate decision.

Inflation fell to 2.5 per cent in July, marking the slowest increase in the Consumer Price Index (CPI) since March 2021.

CPI: 2.5% (from 2.7% in June)

CPI-median: 2.4% (from 2.6% in June)

CPI-trim: 2.7% (equal to 2.8% in June)

Canada's labour market also stalled in July.

Unemployment rate: 6.4% (unchanged from June)

Employment: 0% change from June (loss of 2,800 jobs)

The economy grew more than expected in the second quarter, though growth is off to a slow start for the third quarter.

Q2 GDP: 2.1% annualized (vs. 1.8% annualized in Q1)

June GDP: 0% change on a monthly basis

Preliminary July GDP estimate: 0% change on a monthly basis

In a morning note, Derek Holt, vice-president and head of capital markets economics at Scotiabank says a 50 basis point cut would be a “policy error” and views it as unlikely given BoC governor Tiff Macklem’s stated commitment to data dependence.

Holt points out the negative signalling effect a larger cut could have, but also says the market could become enthusiastic about more larger cuts. They “would likely move to price another outsized move and push the BoC, which may not be comfortable doing so and could risk disappointing markets later,” he writes.

Holt also argues that the BoC should save a bigger cut in case one is genuinely needed. “They should keep their powder dry for potentially more exigent circumstances, like market dysfunction (not just price discovery) or a more alarming turn lower in the data.”

While interest rates have dropped as the Bank of Canada continues on its loosening cycle, the reaction in the housing market has so far been muted. The Canadian housing market softened slightly in July from a month earlier, as sales fell and new listings inched up, according to the Canadian Real Estate Association (CREA).

But some expect that will change with a third consecutive rate cut from the central bank.

"While it wasn't apparent in the July housing data from across Canada, the stage is increasingly being set for the return of a more active housing market," CREA chair James Mabey said in a statement.

"Real estate market activity has been resistant to the rate cuts we've received so far, but that could soon change as the impact of additional rate decreases compounds and materially improves affordability conditions for borrowers," Penelope Graham, mortgage expert at Ratehub.ca, said in a statement.

Most economists expect another 25 bps cut from the BoC this morning, but there have been rumblings about a deeper 50 bp drop. Brooke Thackray, a research analyst at Global X, an exchange-traded fund provider, argues the only scenario where this could happen is if the BoC has advance knowledge of labour data to be released this Friday “and it is much worse than expected.”

A larger cut “would signal that economic conditions are much worse than previously thought,” Thackray writes, but he says most available indicators are to the contrary. “The Canadian economy is stable at this point,” he says, with inflation unresolved but reasonably low and GDP figures acceptable. The 6.4 per cent unemployment rate “is a lagging indicator and reflects the economic conditions of the past. Although the rate is still low, there is a definite trend higher from the 4.9 per cent low in 2022. Nevertheless, a 6.4 per cent unemployment rate does not warrant a 50 bps point cut this week.”

Much of the conversation about rate cuts has centred around a softening economy, with sporadic warnings about signs of a recession lending fuel to some Canadians' gloomy economic mood. But what if the reality is not as bad as that gloomy outlook?

That's what Scotiabank economist Rebekah Young suggested in a recent paper, in which she assails "fearmongering" about a recession and notes various data showing a surprisingly strong economy — household net worth, for example, is "roughly $20,000 above what would have been projected based on trend growth since 2019."

Given the economic challenges of the era, Young argues that a "rational optimism" is needed to avoid "continuing to talk ourselves into decline."

Stock indices have gone on a wild ride since the Bank of Canada and the Federal Reserve's apparent shifts in tone from fighting inflation to ensuring soft landings for their respective economies.

North American markets tumbled in early August when weaker-than-expected U.S. economic data spooked investors. Fears about an unravelling of the U.S. economy weighed on Canada's main stock index, adding to concerns over cash-strapped consumers north of the border.

"This is the stage where markets typically get nervous on whether the Fed has got the timing right, evidenced by recent bouts of volatility," TD Bank chief economist Beata Caranci wrote in an Aug. 26 research note. "We can expect to see pricing jump around between a Fed that needs to act urgently to one that can move in a measured way."

Investors will have to wait until the Federal Open Market Committee's next meeting set for Sept. 17 to 18 for clues on how that will play out.

"In all circumstances, one prediction will hold firm: the Fed will cut interest rates in September, kicking off a prolonged cycle," Caranci added.

"This is not a one-and-done deal."

As investors eagerly await the Bank of Canada's interest rate announcement this morning, futures tied to the Toronto Stock Exchange slipped on Wednesday.

According to Reuters, September futures on the S&P/TSX index were down 0.2 per cent at 6:02 a.m. ET on Wednesday, as crude and metal prices declined.

The TSX ended more than 1 per cent lower on Tuesday, tracking declines in materials and energy stocks.

Since the Bank of Canada's second rate cut on July 24, activity at other major central banks has been minimal, though not exactly quiet.

The European Central Bank — which sets monetary policy for countries in the eurozone, including G7 members France, Germany and Italy — made a preliminary cut on June 6, a day after the BoC broke the ice, but has had no meetings scheduled since then.

The Federal Reserve held its rate steady at 5.35 to 5.50 per cent at its meeting on July 31, with markets now expecting it will cut when it next meets on Sept. 12. Earlier on July 31, the Bank of Japan, which has held rates near zero for years due to chronic disinflation, raised its rate 15 basis points to 0.25 per cent. It was a move that some argue was a catalyst for global market volatility in the days that followed.

A day after that July 31 Fed hold, the Bank of England reduced its rate by 25 basis points to five per cent, its first cut since the pandemic.

Just like the "bulls" and "bears" of the stock market, central bank policy is often described in animalistic terms.

Simply put, "dovish" central bankers tend to support lower interest rates, valuing low unemployment and a strong economy over keeping inflation down.

"Hawkish" policymakers tend to favour higher interest rates to keep inflation low, even if it means sacrificing some economic growth, consumer spending, and jobs.

RBC Capital Markets has built a dashboard that analyzes the Bank of Canada's press releases, summaries of governing council deliberations, parliamentary testimonies, monetary policy reports, financial system reviews, statements, and speeches with an AI-based language tool.

Here's a look at how hawkish or dovish members of the Bank of Canada's governing council have been in their communications so far in 2024.

Here's 2023 for comparison:

There was a marked shift in tone when the Bank of Canada issued its interest rate decision in July. Until then, the central bank had stressed that cutting rates too quickly could jeopardize progress made on lowering inflation. But in July, Governor Tiff Macklem said that "the downside risks are taking on increased weight in our monetary policy deliberations."

"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," Macklem said in a prepared opening statement.

Economists noted the dovish tilt from the central bank.

"One gets the sense that further rate cuts will now only be dissuaded by the data, cuts no longer need to be persuaded by them," BMO Capital Markets deputy chief economist Michael Gregory wrote in aresearch note.

Uncertainty over Canada's rapid population growth has muddied the Bank of Canada's view of the economy, prompting discussion about whether certain demographics should be removed from the central bank's calculations.

"Members agreed that uncertainty about population growth was contributing to uncertainty about the economic outlook," BoC policymakers wrote in their latest summary of deliberations published earlier this month. "Members expected consumer spending to strengthen in 2025, even as population growth slowed. However, this outlook was clouded by differences among segments of the Canadian population."

According to Statistics Canada data released last Friday, GDP per capita fell 0.1 per cent in the second quarter, marking a fifth consecutive quarterly decline. That means the economy is not expanding fast enough vis-a-vis population growth.

However, Derek Holt, vice-president and head of capital markets economics at Scotiabank, says the Bank of Canada "should not treat all bodies as having the same impact" on the economy.

"Students, temp foreign workers and asylum seekers are not contributing one-for-one in proportionate terms to GDP growth as others, so why treat them as such?" Holt wrote in an Aug. 28 research note.

"The economy is performing better in real per-capita GDP terms than some say because many non-permanent residents should be removed from the calculations."

Another Bank of Canada benchmark rate cut would mean lower monthly payments for those holding variable-rate mortgages. For every $100,000 of a variable-rate mortgage, a 25-basis-point cut reduces monthly payments by about $15.

Fixed mortgage rates, however, don't move in lockstep with the Bank's rate cuts and are tied to the bond market. Bond markets have likely already priced in a rate cut today, although the BoC's messaging on further cuts may be a factor for investors to consider.

A rate cut would also mean Canada's top banks will follow suit and lower their prime lending rates. The prime lending rate at the country's largest banks currently sits at 6.7 per cent. With a 25-basis-point cut, prime rates would sit at 6.45 per cent.

Canada's rising unemployment rate is surely under close BoC scrutiny, National Bank economists Taylor Schleich and Warren Lovely wrote in a preview report last week. Schleich previously argued that unemployment could hit seven per cent by year-end without immediate further interest rate cuts.

The economists now expect that number to be reached regardless of the BoC’s moves and say "there will be a growing focus on the labour market going forward" at the central bank.

"We'd stress that a quick bounce-back is unlikely and the jobless rate should continue marching towards seven per cent this year. That should keep a steady dose of rate cuts coming in 2024 and beyond."

In a recent interview with Yahoo Finance Canada, Rebecca Oakes, Equifax Canada's vice-president of advanced analytics, noted that rising unemployment tends to have a faster, sharper effect on the economy than rising inflation.