Analysts predict the Bank of Canada will implement larger rate cuts, targeting 2.25 percent by 2025
The Bank of Canada is unlikely to maintain its current pace of interest rate cuts, according to analysts at CIBC Capital Markets, who suggest a need for more aggressive action due to ongoing soft economic data.
In a report by Financial Post, analysts forecast two significant interest rate cuts of 50 basis points, anticipated in December and January, bringing rates down to 2.25 percent by June 2025.
Since June, Bank of Canada officials have already implemented three cuts of 25 basis points.
Sarah Ying, head of currency strategy at CIBC, emphasized during a recent webinar that the bank should not proceed slowly, as inflation risks are diminishing while growth risks are increasing. She noted the potential for larger rate moves, though timing will depend on economic data.
The topic of jumbo-sized interest rate cuts gained traction after the US Federal Reserve's recent cut of 50 basis points, its first in over four years.
Some economists believe this could prompt the Bank of Canada to consider larger cuts; however, Ying disagrees, stating that Canadian decisions should be independent of US actions.
She highlighted the necessity for the Bank to return to normal interest rates—between 2.25 percent and 3.25 percent—more swiftly.
If the Bank of Canada aims for a target rate of 2.25 percent, it would take eight additional meetings of quarter-point cuts.
Ying expressed concern that time is limited, especially given that August inflation was at the target rate of 2 percent but would be lower at around 1.3 percent without mortgage interest costs.
The recent adjustment in the Consumer Price Index (CPI) weights indicates that mortgage costs now significantly influence inflation measures, suggesting potential downside risks if rates decrease more rapidly than expected.
Economic data shows mixed signals. Retail sales rose 0.9 percent in July, surpassing estimates, with Statistics Canada forecasting a further increase of 0.5 percent for August.
This suggests a stronger third quarter gross domestic product (GDP) than previously expected, despite indications of stalling growth in June and July. Ying cautioned against overestimating this growth, noting that retail sales on a per-capita basis declined 1.3 percent in real terms over the past year.
The Bank of Canada recognizes the impact of population growth on economic data. In its latest Monetary Policy Report, it forecasts third-quarter GDP growth of 2.8 percent, factoring in a 3 percent population increase.
Ying remarked that this effectively nullifies the perceived growth on a per-capita basis.
Additionally, households are dedicating more income to servicing debt rather than consumption, and Canada’s labour market slack appears worse than in the US, leading to a more asymmetrical balance of risks in Canadian economic data.
