Introduction to Interest Rates
The Bank of Canada is set to decide whether to cut, hold, or increase interest rates. A growing number of economists say they are anticipating a cut. Andrew Grantham, executive director and senior economist at CIBC, believes that the Bank of Canada should and will cut interest rates again. Recent data hasn’t been particularly threatening from an inflation point of view, and the Bank of Canada has room to respond to the signs of a slowing economy.
Economic Data and Interest Rates
The Bank of Canada’s upcoming decision comes after several rounds of economic data released over the summer that suggest the economy and labor market are weakening. This includes the third straight drop in gross domestic product in June, and recent consumer price index reports that show inflation appears to be stabilizing within the central bank’s one to three percent target range. The Labour Market Survey for August also showed that unemployment rose to more than seven percent, which economists say will likely factor into the Bank of Canada’s assessments.
What Kind of Cut Are Economists Eyeing?
Grantham and other economists are predicting the Bank of Canada will cut rates by 25 basis points, which would bring its benchmark from 2.75 percent to 2.5 percent — with potentially more to come after. If there is a cut on Wednesday and a cut in October, that would likely bring interest rates down to what Grantham said economists describe as a "neutral level." This would help stimulate the economy, lower the unemployment rate, and get rid of the "slack" within the Canadian economy.
How Do Interest Rates Impact You?
Interest rate policy determines the floor on which commercial banks and other lenders base their own borrowing costs for their customers. This may include a mortgage or business loan from one of the big Canadian banks, or an auto loan from a car dealership. When the Bank of Canada changes its overnight benchmark, lenders will typically change the rates given to customers and clients as well. For those who are applying for such loans or have variable-rate contracts, the amount they end up paying can change depending on the timing of the central bank’s policy decision.
The Real Estate Market and Interest Rates
In the real estate market, potential homebuyers may hold off on applying for a mortgage if the expectations are high that the Bank of Canada may change its base interest rate soon. This is because for many potential homeowners, the amount they can afford could change as a result of these policy shifts. The Bank of Canada’s mandate is to maintain stability and balance in the economy, which it does mainly by adjusting monetary policy, or interest rates, as needed.
The Impact of Trade Wars on Interest Rates
The summer economic data and the upcoming rate decision all come against the backdrop of the trade war with the United States, sparked by President Donald Trump’s tariff policies. Prime Minister Mark Carney is still working to reach a trade and security deal with the U.S. in a bid to get tariffs removed, but Canada still faces 35 percent tariffs plus multiple tariffs on key sectors. The uncertainty caused by the trade war means that businesses and consumers will need a lower interest rate to achieve the same level of growth that they would without that uncertainty.
Conclusion
In conclusion, the Bank of Canada’s decision to cut, hold, or increase interest rates will have a significant impact on the economy and individuals. Economists are predicting a cut in interest rates, which would help stimulate the economy and lower the unemployment rate. The trade war with the United States has added uncertainty to the economy, and the Bank of Canada will need to take this into account when making its decision. As the Bank of Canada navigates these challenging times, it’s essential for individuals to understand how interest rates impact them and the economy as a whole.
