Policymakers are likely to lower rates for a third time as inflation slows and economic risks rise
The Bank of Canada is set to reduce interest rates for the third time in a row, as officials aim to guide the economy to a soft landing while inflation fears subside, according to BNN Bloomberg.
Markets and economists widely predict that the central bank, led by Governor Tiff Macklem, will lower the overnight rate to 4.25 percent on Wednesday.
Speculation also surrounds whether policymakers will address the longer-term outlook, especially as the US Federal Reserve prepares for potential rate cuts, with many forecasters expecting rate reductions to continue well into 2025.
Bloomberg's survey of economists projects a quarter-percentage-point cut at each of the Bank of Canada's next five meetings, bringing the policy rate down to 3 percent by mid-2025.
This would place the rate within the bank’s neutral range, the level at which interest rates neither accelerate nor hinder economic activity. Claire Fan, an economist at the Royal Bank of Canada, believes the central bank has no choice but to reduce rates as economic weakness persists.
“They’ve got to do something at this point to get rates down,” Fan stated, adding that the current rates are unnecessarily high.
In June, Macklem initiated a monetary easing strategy, becoming the first central banker among the G7 to do so. He cut rates again in July but emphasized that future rate cuts are not predetermined. He assured that data would guide the central bank's decisions going forward.
Bank officials have indicated that further rate cuts are likely if inflation continues to ease. The inflation rate has remained within the bank’s target range of 1 to 3 percent for seven consecutive months, reaching 2.5 percent in July.
Core inflation measures have also slowed, with fewer sectors experiencing widespread price hikes.
The central bank has now shifted its focus toward downside risks to the economy. A summary of discussions from July shows that officials devoted significant time to analyzing the country's weakening labour market.
In addition, it has become clearer since then that the US Federal Reserve will soon lower its own interest rates. This development may reduce concerns that the Bank of Canada is acting too swiftly compared to its largest trading partner, which could have put downward pressure on the Canadian dollar.
Markets have already priced in a 0.25 percent rate cut for Wednesday, with the likelihood of a more significant 0.50 percent cut at less than 10 percent. Such a larger cut would likely unsettle markets and suggest that the Bank of Canada is facing deeper economic challenges than anticipated.
Fan warned that a larger cut could cause unnecessary panic given current market conditions.
While most economists expect moderate cuts, some believe that the Bank of Canada may hint at larger reductions if needed. Macklem is unlikely to claim victory over inflation, but he could shift focus to the economy and labour market while downplaying concerns about price pressures.
Royce Mendes, managing director of macro strategy at Desjardins Securities, believes that the Bank’s communication could become more dovish. He noted that inflation is no longer the primary issue for the Bank of Canada, as employment is now the central concern.
Canadian consumers are feeling the effects of higher borrowing costs, with per-capita household consumption declining at rates typically seen during recessions. Although immigration has bolstered overall economic growth, many households face mortgage renewals at significantly higher rates.
Despite this, economists do not expect widespread layoffs. The jobless rate has risen to 6.4 percent from 5 percent at the start of last year, but it is expected to peak at around 6.7 percent by the end of 2024, according to a Bloomberg survey.
Canada’s economy grew at an annualized pace of 2.1 percent in the second quarter, largely due to government spending. However, initial forecasts suggest a slowdown in growth for the third quarter.
The Bank of Canada’s rate decision will be announced at 9:45 am Ottawa time on Wednesday, with Macklem and Senior Deputy Governor Carolyn Rogers speaking to the media at 10:30 am.
