Jimmy Jean predicts 50-basis point rate cuts starting in October as inflation reaches 2 percent in August
Jimmy Jean, chief economist at Desjardins Group, discussed with Financial Post’s Larysa Harapyn the implications of this week’s inflation data on the Bank of Canada’s interest rate decisions, the broader economy, and Canadians.
According to Jean, Canada’s inflation rate fell to 2 percent in August, a pivotal moment for the Bank of Canada. The exact inflation figure of 1.95 percent is below the target rate for the first time since 2021. Jean suggests that this shift changes the Bank of Canada's outlook.
“It’s no longer a position where you can continue to harp on upside risk to inflation when the data has proven otherwise.” He notes that 47 percent of inflation components are growing below 1 percent, while 27 percent are above 3 percent, indicating a skew toward low inflation.
Jean warns that some components may enter deflation, highlighting the Bank of Canada's “overly restrictive” monetary policy.
Jean predicts a 50-basis point cut at the October meeting, pointing out that the Bank of Canada previously had reasons to start rate normalization earlier but delayed. Current evidence shows that the economy has more slack, with inflation undershooting expectations.
“It’s time to be more serious about getting back to neutral,” says Jean, noting that a quicker return to neutral is necessary.
Regarding the impact of higher rates, Jean believes they have worked, citing weakened discretionary spending, particularly in areas like travel accommodation and hotels, which are sensitive to interest rates.
Jean also highlights the highest savings rate since 1994 due to the pandemic, contributing to consumer cutbacks. He points out that third-quarter GDP growth is tracking at 1 percent, significantly lower than the Bank of Canada’s 2.8 percent projection.
Jean expects further economic challenges in 2025 due to caps on temporary residence and mortgage renewals.
Looking ahead, Jean forecasts that rates should ultimately land around 2.25 percent by 2025. He expects a 50-basis point cut in October, followed by another in December, leaving rates at 3.5 percent by the end of the year before further cuts next year.
Jean will closely watch GDP and job market data in the coming weeks. He is particularly concerned about the inconsistent job market and potential layoffs, which could worsen if the Bank of Canada does not act quickly to prevent further economic deterioration.
