Many Canadians are eagerly watching the Bank of Canada’s interest rate announcement this week to see if it could mean a bit more breathing room for their finances.
But many experts believe the current rates for those who make regular payments on loans like a mortgage won’t be changing any time soon.
This is partly to do with how U.S. President Donald Trump’s tariffs are impacting Canada’s economic landscape.
Canada’s central bank could potentially change interest rates on Wednesday. Although most experts believe that amount won’t rise in the near future, they say it is more likely rates will stay the same rather than come down.
“The Bank of Canada has little confidence in the outlook,” Bank of Nova Scotia vice-president and head of capital markets Derek Holt says.
“GDP is tracking a little firmer than anticipated and (the Bank of Canada) is in no rush to react.”
What is the Bank of Canada and how does it affect the economy?
Unlike regular banks — like those on Bay Street, for instance — the Bank of Canada acts in the interest of the economy as a whole rather than for its own profit, and is independent of the government and its policies.
Its mandate is to maintain economic stability, and it does so by regulating money supply and interest rates — the amount regular banks and other lenders can charge customers to borrow money.
Several times a year, the Bank of Canada updates interest rates when it sets monetary policy.
Regular banks set their own interest rate, known as the “prime” rate, off of the benchmark or overnight rate, the rate floor that is set by the Bank of Canada.
The central bank’s benchmark rate is currently set at 2.75 per cent, and could be updated on Wednesday.
How does the Bank of Canada determine interest rates?
The central bank uses a combination of economic reports and surveys on business and consumer sentiment to determine monetary policy.
One of the key metrics is inflation, the main example being the consumer price index.
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This is a measure of the increasing prices for consumer goods and services. CPI in April showed that prices overall didn’t rise as much as most economists predicted, but that was overshadowed by how much gas and energy prices fell from the removal of the consumer carbon price.
The underlying inflation gauge known as “core” inflation actually showed an increase in April.
“We are a bit hesitant on (rate cuts) after the April CPI report,” says senior economist Jennifer Lee at the Bank of Montreal.
“The Bank of Canada is very focused on inflation — they have to make sure that they get inflation under control.”
The job market is also monitored closely, and has also been showing signs of weakness as businesses brace for rising costs from tariffs, and in some cases this has meant rising unemployment and job losses.
TD Bank has warned that the economy could see thousands of more jobs lost this year in addition the heightened recession risk, citing the trade war and tariffs.
On Friday, Statistics Canada will release the jobs report for May.
“The next jobs report two days after the Bank of Canada’s decision is likely to post another loss,” Holt says.
The Bank of Canada also closely monitors the country’s economic growth, including gross domestic product.
The GDP report for March and the first quarter of the year came in better than most economists expected, but they noted that a lot of the increased production output was businesses potentially stockpiling shelves and warehouses in anticipation of the financial impacts of the trade war.
“We are still expecting Canada to be hit negatively by the trade war and all of the uncertainty,” Lee says. “We’re still looking for a technical recession, which is two consecutive quarters of negative GDP growth.”
What could a rate cut mean for Canadians and the economy?
The Bank of Canada took a cautious approach at the last announcement, opting to leave rates as they are.
For many Canadians, changes to interest rates could mean the difference between paying off balances in full and struggling to make payments.
If someone has a variable-rate mortgage, for instance, and the Bank of Canada chooses to cut interest rates, then those mortgage holders will see their monthly costs come down.
Another example is if someone is applying for a mortgage or even a car loan, the rate they pay on that loan now may decrease the day after the central bank announces a rate cut.
“In Canada, we’re sensitive to interest rates. But interestingly, I actually think lower rates are not the issue at all here,” says mortgage expert and broker Elan Weintraub at Mortgage Outlet.
“The issue is, (for borrowers,) ‘Am I going to get laid off?’ So I actually don’t think interest rates are playing as big of a role.”
A cut to interest rates by the central bank could, in theory, make it more affordable for companies to hire new workers and boost production.
“The (Bank of Canada) should really be resuming interest rate cuts to buffer the Canadian economy,” says principal economist Andrew DiCapua at the Canadian Chamber of Commerce.
“I don’t see a lot of upside inflation risks just given how much the Canadian economy could head into a recession in the coming months.“
How likely is a rate cut on Wednesday?
Many economists have been predicting a rate cut for Wednesday, but the odds have come down slightly given some of the recent economic data and trade war developments, including Trump’s threat to increase steel and aluminium tariffs by 50 per cent.
“We are no longer looking for the Bank of Canada to cut rates this week,” Lee says.
“This new added uncertainty of a doubling of tariffs on steel and aluminum was a little bit of a wrench thrown into the mix.”
Holt also predicted no rate cut this time, saying, “Markets now only have a one-in-five chance of a cut priced after backing away from what had been pricing for more than a quarter of a percentage point cut around early April.”
Although most economists aren’t expecting a rate cut this time, many still feel that the central bank should consider cutting interest rates sooner than later.
“It’s kind of a 50-50 call,” DiCapua says.
“They’re waiting for this shoe to drop, so to speak — one clear data point that’s showing the sort of widespread economic shock has begun, but there is more cutting that will need to be done this year.”
