More needed to boost the economy but data remains the key to decisions
The Bank of Canada went jumbo Wednesday but some major Canadian economists are not expecting it to be the only one this year.
Cutting interest rates by 50 basis points was highly anticipated following September’s CPI data showing a dip to 1.6% that was well below the central bank’s 2% target. But at 3.75% the overnight rate is still elevated and boosting growth will require further cuts.
That could be mean another 50bps cut in December or a more gradual path, with the BoC closely watching data to inform its decision.
RBC Economics’ Claire Fan says rates will be 2% by July 2025 and is one of the economists predicting that there will be another jumbo in December, given the RBC team’s expectations that GDP will be far lower than the BoC is expecting, 1.3% versus 2.1% for 2025. With a softening labour market and rising unemployment, and softening activities having a disinflationary impact.
CIBC Economics predicts a 2.25% base interest rate will be achieved in the second quarter of 2025, and economist Avery Shenfeld says: “it would take a major turn of events to stand in the way of another 50 basis point reduction in December [2024], driven by the same logic as [this week’s] decision.”
TD Economics has cuts of a total 150 basis points pencilled in through 2025 with economist James Orlando stating: “…while the pace of cuts going forward is now highly uncertain, the direction for rates is firmly downwards.”
PIMCO economist Tiffany Wilding concurs that rates may need to fall further to stave off a weakening economy and disinflation. “In the near-term we expect the BoC to remain data dependent and think another 50 bp rate cut will be on the table in December if data remains weak in the coming weeks,” Wilding said.
Wilding has also been sharing her insights into whether the US economy could be returning to normal.
Meanwhile, PIMCO portfolio manager Vinayak Seshasayee says the BoC’s rate cutting cycle presents an opportunity for Canadian fixed income.
“The Canadian economic backdrop suggests the Bank of Canada is likely to cut faster and deeper than the Federal Reserve,” he said. “While there are limits to how far the two central banks are likely to diverge, in our view, BoC policymakers should have the confidence to respond resolutely to domestic conditions. If we see these monetary paths diverge, then spreads between Canadian and US bonds are likely to become increasingly negative, while the Canadian dollar could come under further pressure, especially in the absence of any demand-driven rebound in oil prices.”
