Central bank could bring rates lower again in July, suggests economist
The Bank of Canada finally lowered its benchmark rate on Wednesday (June 5) with a 25-basis-point reduction – and has left the door “open wide” for further cuts this year, according to a top economist.
Doug Porter (pictured), Bank of Montreal (BMO) chief economist, told Canadian Mortgage Professional that the central bank’s first cut for over four years had been accompanied by an unexpectedly “dovish” statement suggesting it could be prepared to bring rates lower again next month.
“We thought that there would be a bit more clear of a signal that they’re not going to be moving every meeting,” Porter said. “To me, [Governor Tiff Macklem] really left the door open wide… to the possibility of a follow-up cut in July.
“We had been assuming that they would skip the next meeting and wait a while – but I think [at] the July meeting, there’s a very real possibility that they could follow it up.”
The central bank’s landmark move on Wednesday brought its trendsetting interest rate down to 4.75%, breaking a string of six consecutive announcements keeping that benchmark rate at a 23-year high.
For Porter, Wednesday’s announcement marked a clear indication that the Bank is now intent on continuing to bring rates down – with a potentially significant gradual drop before the end of 2024.
“The only debate seems to be over when the next rate is coming: is it July or September?” he said. “So it does seem like we’re on our way now towards lower rates. It’s not going to be a fast walk down the mountain – I think [Macklem] was pretty clear on that front.
“But I would not be shocked if they cut rates by a full percentage point before the end of the year, including today.”
We have lowered our policy interest rate to 4.75%.
— Bank of Canada (@bankofcanada) June 5, 2024
Learn more: https://t.co/vh3hq6sEA4#economy #cdnecon pic.twitter.com/EJ4uGESc4K
That would leave the Bank’s overnight rate at 4.0% by the end of December, a development that would prove welcome relief for Canadians with variable mortgages and home equity lines of credit (HELOCs) who’ve seen their borrowing costs surge amid central bank hikes in recent years.
For buyers, the Bank’s June announcement may not necessarily light a fire under the national housing market – but it could provide a symbolic boost for homebuyers and a sign that the days of climbing rates are now in the rearview mirror.
“It’s clearly more important from a psychological standpoint than an economic standpoint. A quarter point absolutely matters,” Porter said. “It matters… even in terms of what people are potentially able to borrow, but I think the bigger impact is just psychological.
“We now know for a fact that the Bank is starting to reduce rates and probably there’s more coming that way. And I think that is going to improve the psychology and brighten the mood in the real estate market.”
The calmness of Canada’s real estate market this spring – and the fact that the housing market has remained largely tranquil – may have been strong indicators for the central bank that the time was right to lower rates, Porter said, even though senior deputy governor Carolyn Rogers emphasized the inflation outlook as a more important gauge.
How closely will the Bank of Canada be watching events in the US?
Speculation had risen in recent weeks on the question of whether the US Federal Reserve’s seeming reluctance to cut its own interest rate could give the Bank of Canada pause for thought on bringing rates lower.
At the beginning of the year, markets had anticipated multiple Fed rate cuts by the end of 2024 – but those hopes have now receded, with stubborn inflation and a still-strong labour market in the US even leading to suggestions that rates may not come down south of the border at all.
Still, Porter said Macklem and Rogers had seemed prepared on Wednesday to countenance something of a divergence between Canada and the US on interest rates.
🔴 WATCH LIVE
— Bank of Canada (@bankofcanada) June 5, 2024
Tune in as Governor Macklem and Senior Deputy Governor Rogers take questions from the media following the release of our interest rate decision.https://t.co/LK9NLu4wKj #cdnecon #economy
“What struck me about the press conference is that they really don’t seem that concerned about a somewhat weaker Canadian dollar,” he said. “I think the main message is they have to do what’s right for the Canadian economy – and if a weaker Canadian dollar is a side effect of that, so be it.”
The Bank still has some space to move further away from the Fed on rates without having a big impact on the currency, he added. “So it does seem like they’d be willing to cut again, independent of the Fed. And who knows, maybe a couple of times after that.”
‘Itchy trigger finger’ could see Bank gear up for July rate cut
Nonetheless, while the Bank sounded a reasonably optimistic tone on the rate outlook for the future, Porter emphasized the importance of not getting carried away.
“The main message that Macklem drove home a number of times and in the press release is that they’re going to take this one meeting at a time. I don’t think we should get too far ahead of ourselves,” he said. “In terms of assuming exactly when rates are going to get cut, what makes this interesting is every single meeting is going to be a debate now based on what’s happening in inflation.
“We’re not calling for a rate cut yet in July – but we’ve got two inflation reports between here and there and I think they could have an itchy trigger finger here. If the inflation numbers come in relatively moderate, I think they could easily cut again in July.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
