BoC Warns of Weak Consumer Spending, Rate Cuts Continue

The Bank of Canada expressed concerns over potential weakness in consumer spending in 2025 and 2026, according to minutes from their July meeting released on Wednesday. The central bank had lowered its key overnight rate by 25 basis points to 4.5% on July 24, marking the second rate cut in two months, as worries about slower-than-expected economic growth mount.

Last year, the bank raised rates to a 23-year high of 5% in an effort to curb inflation. However, with many Canadian households expected to renew their mortgages at significantly higher rates in the coming years, the bank now fears this could dampen consumer spending further.

Economists are particularly concerned as approximately C$300 billion worth of mortgages are due for renewal over the next year, potentially curbing economic growth.

Recent poor job data from the U.S., Canada’s largest trading partner, has fueled fears of a recession, driving down bond yields and increasing market expectations of further rate cuts. Money markets are now almost fully pricing in a third consecutive rate cut in Canada next month, with two more cuts anticipated by year-end.

Despite lower borrowing costs potentially boosting consumer expenditure, the bank warned that many households will still face high debt-servicing costs, which could hinder a recovery in spending. Economic growth has lagged behind population growth, leading to excess supply and slack in the labour market, further pressuring consumption and growth.

The Bank of Canada’s Governing Council indicated that additional rate cuts might be necessary if inflation continues to ease, highlighting the ongoing balance between preventing inflation from falling below target and keeping it from exceeding it.