Analysts are predicting that the Bank of Canada will introduce another overnight interest-rate cut on Wednesday as inflation heads downward.

The cut would be the second of the summer, after analysts and commercial real estate industry leaders questioned whether there would be one. The central bank reduced its key lending rate to 4.75% in early June after a series of holds and rapid increases dating back to 2022.

The second BoC cut looms as the BoC’s easing of its monetary tightening policy gains momentum.

“If you start to lower too fast and things just pick up and you get inflation again, you’ve wrecked your credibility a little bit,” said Jeremy Kronick, director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute, told the Globe and Mail.

“But if you look at the trend, it’s pretty good. Inflation has gone down … and the economy is definitely softening.”

Tiff Macklem, the BoC’s governor, signalled in June that more rate cuts were coming. The BoC has softened its stance on rate hikes after maintaining a hard-line position throughout 2023 and in early 2024.

Headline inflation has dropped to 2.7%, moving closer to the BoC’s 2% target. Many economists have cited shelter costs as the primary cause of inflation.

When shelter costs are excluded, the inflation rate comes in under 2%.

“In fact, the only stubborn part of inflation that’s left is shelter,” Tu Nguyen, an economist with RSM Canada, told the Globe. “But that is not going to get fixed by keeping rates high, because we know that a big part of shelter inflation is actually mortgage-interest payments, which are rising because of the higher interest rates.”

Another rate cut would spell welcome relief for commercial real estate investors and developers, who have kept large amounts of capital on the sidelines for a prolonged period. Many CRE industry leaders have indicated that they do not expect another cut to spark a flurry of investment, considering that the last one did not do so.

Yet, many investors and developers view another cut as a means of creating more investment momentum and, eventually, more market activity.

A second summer rate cut would spell further divergence in Canadian and U.S. interest-rate policies. While the BoC contemplates more hikes, the U.S. Federal Reserve is leaning more towards hikes.

The divergence in the BoC and Fed policy rates will continue to narrow the policy-sensitive two-year Canadian-U.S. government bond yield spread, which is currently trading near its lowest level since October 2021 at minus-75 basis points. The longer the Fed waits to cut rates, the narrower the spread will get.

The two-year spread is a fairly reliable barometre of currency trends. The implications are that this situation will lead to a weaker Canadian dollar relative to the U.S. greenback and, possibly, slower Canadian economic growth moving forward. 

– With files from Joe Palmisano, Connect Money

Pictured: Bank of Canada Governor Tiff Macklem