A 26% chance of a Bank of Canada rate cut is expected amid current market uncertainties

    by VT Markets
    /
    Jun 4, 2025
    The Bank of Canada will announce its interest rate decision today at 9:45 am ET. Currently, there is a 26% chance of a rate cut, but most expect the rate to stay the same. Two weeks ago, many anticipated a rate cut, but new data shows stronger-than-expected inflation and a GDP growth of 2.2%, exceeding predictions of 1.7%. This has changed expectations.

    Canadian Housing Market Struggles

    The Canadian housing market is facing challenges. The Toronto Real Estate Board reports a 25% drop in condo sales and a 10.6% decrease in detached home sales compared to last year. Home prices have fallen by 5-6%, and overall home sales are down 17.1% from the previous year. A potential trade deal between the US and Canada could boost market confidence and strengthen the Canadian dollar. There’s a 71% chance of a rate cut at the July 30 meeting, with expectations of easing by 42 basis points this year. Key observations will focus on inflation comments, especially since prices have dipped below 2%. If the Bank of Canada does not change rates, the USD/CAD exchange rate may drop, with a key level to watch at 1.3672.

    Outlook for the Future

    Looking ahead to the midday announcement, with a low chance of a rate cut at 26%, the market is leaning towards a cautious approach. Sentiment has shifted from recent expectations for a reduction, as recent strong data has changed the outlook. With GDP at 2.2% and inflation rising, there’s concern that lowering borrowing costs too soon may be inappropriate. Earlier expectations for aggressive rate cuts now seem more subdued as the economy shows resilience. As the central bank’s decision nears, the focus will be on their language. Even if rates stay the same, their commentary can provide significant insights. Analysts will carefully examine their views on inflation remaining below 2%. A mild tone could point towards a July rate move, while stronger concerns about persistent inflation could change the outlook. The housing data clearly shows domestic pressures. With sharp declines in both condo and detached home sales, and prices down modestly over the year, there is considerable stress in the real economy. However, central banks often respond slowly to housing issues unless broader growth or credit conditions justify action. On the international side, hopes for a trade agreement could lead to quick adjustments in market perceptions. A finalized US-Canada deal might reduce the need for rate cuts by enhancing export optimism and stabilizing the currency, naturally tightening financial conditions and delaying action until late Q3 or later. The 71% chance of a July rate cut remains strong, with markets predicting about 42 basis points of easing by year-end. If this occurs, the pace and size of cuts will likely be smaller than earlier forecasts suggested, making incoming data more critical than in previous cycles. For the USD/CAD exchange rate, if there’s no movement today along with neutral commentary, we might see a brief dip towards the 1.3672 level. However, if it fails to break below this level, market positioning may shift with the next data release. Our next steps depend on whether inflation stays near current levels. If growth remains steady and inflation trends change, the Bank may regain confidence in current rates. If both growth and inflation weaken, guidance in the coming weeks may shift from discussions to preparations for action. Create your live VT Markets account and start trading now.

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