How likely is another interest rate cut from the Bank of Canada in July?

The Bank of Canada (BoC) pleased many homeowners and prospective buyers in June this year when it announced a rate cut.

On June 5, the central bank sliced its overnight lending rate from 5% to 4.75% – the first cut since a series of hikes that began in March 2022. The BoC said it felt confident cutting its rate at the time because inflation was cooling and moving closer to its 2% target.

Now, with a July 24 announcement on the horizon, Canadians are eager to learn what the BoC will do next as the rate set by the central bank influences the cost of mortgages. Will there be another cut?

According to TD Economist Andrew Hencic, it’s looking more likely that the central bank will cut its lending rate again this month – and more rate cuts are expected to come later this year.

“Recent data showing a softening in the labour market and easing inflation have raised the odds of a July rate cut,” Hencic said.

“We're now in the phase of rate cuts and we expect the central bank to gradually reduce interest rates in 2024. The key message here for Canadians is that rate relief is on the way.”

What a rate cut could mean for Canadians

If the BoC cuts rates this month, the pricing of both variable and new fixed rate mortgages could change.

As a reminder, the BoC’s benchmark rate serves as a reference point for the interest rates that financial institutions charge to their customers on products such as mortgages and loans. That means when the lending rate goes up, it is more expensive for Canadians to borrow money. And when it goes down, it becomes cheaper.

If rates fall, Canadian homeowners with variable rate mortgages who have fixed payments will see a higher proportion of their payment go towards the principal amount on their mortgage. Homeowners with variable payments will see their total payment shrink.

And when it comes to fixed rate mortgages, any signals from the BoC on the pace of further cuts could affect bond yields and flow through to fixed mortgage rates. That means if the BoC hints at a faster clip of rate cuts, it could benefit people looking to get a fixed rate mortgage.

However, those who locked in a fixed rate mortgage during the pandemic, when interest rates were at historic lows, could renew their mortgage at a higher rate.

Why TD Economics is predicting rate cuts this year

Hencic says he and his colleagues are predicting rate cuts in 2024 because inflation and the job market are cooling. Recent data showed that inflation is at 2.7%, getting closer to the 2% target set by the BoC.

It’s important to note, however, that even though the BoC said in its June announcement that inflation is trending in the right direction, Hencic says rate decisions are always a fine balancing act: cut too quickly and you risk inflation worsening; cut too slowly and you risk slowing growth more than necessary.

Plus, Hencic says the central bank’s announcements are data dependent. On top of inflation, the BoC looks at data from the job market and the overall health of the economy when making a rate decision.

“Longer-term interest rates have already come down about half a percentage point since late April,” Hencic said. “So, the market is expecting rates to come down.”

What the BoC could do next

The overall message from TD Economics is that rate cuts seem to be on the horizon. After the July 24 announcement, the BoC has three more scheduled announcements for this year: September 4, October 23, and December 11.

“If we don't get a cut in July, it could come in September,” Hencic said.

“But I think what's more important than looking at things from a meeting-by-meeting basis is to look at the totality of the TD Economics forecast. We're looking for the central bank's policy rate to be cut by about two percentage points by the end of next year.”

So, in other words, Canadians could see the current 4.75% overnight lending rate drop to 2.75% by the end of 2025.

“Rates are forecasted to come down,” Hencic said, “and they are expected to continue to come down as the economy gradually slows down and the labour market cools.”