Interest Rate Update: Canadian Homeowners to See Relief Soon, but Maybe Not June 5, Analysts Say

People pass the Bank of Canada building on Wellington Street in Ottawa on May 31, 2022. The Canadian Press/Justin Tang

A central bank interest rate cut is coming soon to offer relief to Canadian homeowners worried about mortgage payments, analysts agree. But they don’t quite agree on how soon.

The central bank’s key interest rate, the overnight lending rate, has remained at 5 percent since July last year amid persistent increases in the cost of living. Slowdowns in inflation over the last four months, though, have raised hopes among borrowers that the central bank will lower the interest rate as early as its next meeting, set for June 5.

Others say persistent complaints about the rising price of the cost of living—with a 21.4 percent increase in the cost of food alone over the past three years—will prompt the central bank to pause before it lowers the interest rate, which generally has the effect of boosting spending and raising prices further. In that case, many analysts predict an interest rate cut will come only in the regulator’s July meeting.

But whether the rate cut comes in June or July “has very little impact on the outlook,” says Charles St-Arnaud, chief economist at financial institution Alberta Central and former economist of the Bank of Canada.

“What matters more will be the speed and the number of cuts we will see over the next year,” he said.

Mr. St-Arnaud wrote in an analysis posted to social media that if the central bank doesn’t cut the rate in June, “it would be a matter of extreme caution in our view, rather than suggesting that upside risks to inflation remain a concern.”

TD Bank economist James Orlando disagreed with the timing of a rate cut, saying he expects the central bank to hold the rate at 5 percent as it would prefer inflation to slow to around 2 percent. But he said homeowners could feel some relief on June 5 regardless.

“We’re looking for some signal from the BoC to help bolster confidence that a lower rate could be coming in July,” he wrote in an analysis for TD. “Even though we expect the current rate to be maintained, we are anticipating accompanying communication from the BoC that a rate cut will be coming soon.”

If the bank holds the interest rate at 5 percent in June, he said homeowners could still feel relief if it indicates in statements accompanying the rate decision that a cut is likely to come in July.

“Bond yields would come down, and fixed mortgage rates could start coming down, even before the BoC starts cutting that interest rate,” he said. “So, if the BoC signals that this rate cut is going to happen, Canadians looking for longer-term mortgage products could see some relief.”

Inflation on Target

Statistics Canada reported May 21 that annual inflation slowed in April to 2.7 percent, from 2.9 percent in March, within the Bank of Canada’s target of between 1 percent and 3 percent. The inflation report offered some good news to shoppers, as the increase of food prices slowed slightly, to 1.4 percent in April from 1.9 percent in March. However, gas prices continued to stress drivers, with an annual gain of 6.1 percent in April, accelerating from 4.5 percent in March.

The rate-setters must also take into account economic growth, economists say, as lower interest rates are a key accelerator to a sluggish economy, which affects job creation and other measures of quality of life.

A study published by the Fraser Institute on May 16 says Canada’s real gross domestic product (GDP) per person—an inflation-adjusted measure of the goods and services produced by the nation per individual—dropped 3 percent between April 2019 and the end of 2023, from $59,905 to $58,111, which is the second-longest decline in the last 40 years.

RBC analysts Nathan Janzen and Abbey Xu wrote in a recent RBC outlook that population growth in Canada has outstripped economic growth, meaning GDP per person is dropping. This slowdown could help persuade the central bank to lower rates in June, they said.

“The economic backdrop in Canada has continued to soften on a per-capita basis with unemployment drifting higher and wage pressures and inflation showing further signs of easing,” they wrote. “We continue to expect the first rate cut from the Bank of Canada in June.”