Bank of Canada June Interest Rate Decision

On June 5th, the Bank of Canada will announce its interest rate decision, with many analysts anticipating no change despite earlier expectations for potential cuts. Initially, it seemed like the Bank of Canada might lower rates to focus on long-term growth, but recent economic indicators suggest otherwise.

Economic Growth and Inflation Concerns

Governor Tiff Macklem recently highlighted the improving economic growth: “We expect GDP growth to be solid this year and to strengthen further in 2025.” However, a key challenge is ensuring productivity keeps pace with this growth. Senior Deputy Governor Carolyn Rogers emphasized the need for businesses to invest in better tools and training for their workers to boost productivity and prevent inflation from rising.

The Bank of Canada aims to avoid undoing progress made in reducing inflation. Macklem warned, “Lowering our policy interest rate too early or too fast could jeopardize the progress we’ve made.” He anticipates core inflation will gradually ease, with CPI inflation likely remaining around 3% in the coming months before falling below 2.5% later this year and reaching the 2% target in 2025.

External Factors and Future Projections

External factors such as global tensions, rising house prices, and wage growth relative to productivity could impact inflation rates. Conversely, weaker-than-expected economic activity could cool demand and inflation too much. In the U.S., aggressive rate hikes by the Fed have surprised economists with resilient economic growth, potentially keeping inflation in the 3%-4% range.

Market tools like bankers’ acceptances (BAX contracts) suggest a downward trend for Canadian interest rates:

46% chance of a 0.25% drop by June 2024
33% chance of a 0.50% drop by September 2024
61% chance of a 0.75% drop by March 2025
59% chance of a 1.00% drop by September 2025
Despite a less likely rate cut next week, long-term expectations remain optimistic. In the U.S., the CME FedWatch tool indicates a 99.9% chance of rates staying on hold in June.

Governor Macklem reassures Canadians, “We are getting closer” to reducing interest rates but emphasizes the need for sustained progress towards price stability. While the exact timing of rate cuts remains uncertain, the Bank of Canada remains cautiously optimistic about the future.