Economists and market watchers are betting the Bank of Canada will deliver another interest rate cut this week amid mounting evidence that inflation is sustainably easing.

Expectations that the bank will lower its overnight lending rate when it makes its scheduled announcement Wednesday have been high since last week鈥檚 release of the latest Statistics Canada inflation report, which showed annual inflation cooled to 2.7 per cent in June.

The inflation reading was less than the 2.8 per cent that markets had been expecting and has helped to build market confidence that the Bank of Canada may be poised for a second rate cut, on top of the 25-basis-point cut it announced last month.

鈥淚 think it鈥檚 very likely the Bank of Canada cuts rates again next week. It wouldn鈥檛 really make sense from a strategic point of view to only cut rates 25 basis points and then leave them there and see how the economy responds, because that wouldn鈥檛 really cause a lot of change in the trajectory of the economy or inflation,鈥� said Royce Mendes, managing director and head of macro strategy at Desjardins.

鈥淪o it always made sense that the Bank of Canada was likely going to do at least two rate cuts in a row before pausing. And now recent data has reinforced that view.鈥�

Last month鈥檚 interest rate cut, which reduced the central bank鈥檚 key rate from five to 4.75 per cent, was the first in more than four years.

In addition to the latest inflation report, Mendes said, recent data showing rising unemployment as well as subdued expectations for growth by Canadian businesses all support the prospect of another cut.

While inflation remains higher than the Bank of Canada鈥檚 two per cent target, Mendes said he believes delaying any longer could have negative repercussions.

鈥淭he interest rates at the levels they are (currently) are actually very restrictive. You can see it in consumer spending trends. You can see it in the housing market,鈥� Mendes said.

鈥淚 would say if (the Bank of Canada) didn鈥檛 cut next week, it would signal a much greater willingness to tip the economy into recession, just for the sake of getting inflation down a few tenths of a percentage point more.鈥�

The latest Statistics Canada report on retail sales Friday showed Canadians reined in their spending in May as retail sales dropped 0.8 per cent to $66.1 billion.

Sales were lower in eight of the nine subsectors tracked, the agency said.

鈥淲hat the Bank of Canada is trying to do is just reduce the amount of restraint it is placing on the economy. It鈥檚 not trying to stimulate the economy, it鈥檚 just trying to reduce the amount of headwinds it鈥檚 providing,鈥� Mendes said, adding a second rate cut could make Canadian consumers begin to feel more confident about spending again.

The most recent data on the Canadian job market shows the economy stalling in June, losing 1,400 jobs while the unemployment rate rose to 6.4 per cent, from 6.2 per cent in May.

The June result was the highest reading for the unemployment rate since January 2022, another indication that raises the odds of the Bank of Canada lowering rates this week.

But while most market watchers believe an interest rate cut will come this week and be followed by additional cuts later in the year, that view is not unanimous.

Clay Jarvis, mortgage and real estate expert for NerdWallet Canada, said this week鈥檚 decision could go either way.

鈥淐onsidering how cautious the bank is, reducing the overnight rate when inflation is still well over two per cent would be fairly uncharacteristic,鈥� Jarvis said in a note.

If the cut does happen, shaving 25 basis points off of variable interest rates is unlikely to be enough to shake up Canada鈥檚 housing market significantly, Jarvis added, as buyers grapple with the prospect of higher mortgage payments.

A survey conducted by CPA Canada (an organization which represents professional accountants) and BDO Debt Solutions conducted shortly after the June rate cut found half of Canadians say interest rate hikes have negatively impacted their debt loads, with seven out of 10 saying the June cut had no impact on their financial outlook.

The survey also found 52 per cent of respondents believe continued interest rate cuts won鈥檛 go far enough to reduce the financial strain.

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