Bank of Canada expected to lower rates for a third time as inflation slows, aligning with market forecasts
Economists expect the Bank of Canada to cut interest rates for a third consecutive meeting next week, according to BNN Bloomberg.
This move is anticipated to continue a downward trend in borrowing costs over the coming year as inflation eases.
Governor Tiff Macklem and his team are anticipated to lower the benchmark overnight rate to 4.25 percent at the September 4 meeting, based on the median estimate from a Bloomberg poll conducted in August.
The poll suggests that economists predict more aggressive rate cuts over the next year, with the central bank’s policy rate expected to decrease from the current 4.5 percent to 3 percent by next July. By 2026, the overnight rate is forecasted to average 2.75 percent.
This outlook aligns with market expectations of a gradual shift toward less restrictive monetary policy.
Traders in overnight swaps anticipate that Macklem will implement more than 150 basis points of easing by next summer, moving closer to the so-called neutral rate, where borrowing costs neither stimulate nor suppress economic growth.
Economists maintain that Macklem’s goal of a soft landing remains the most likely scenario, forecasting a 1.7 percent growth rate for Canada’s economy in 2025.
This growth is expected as interest rates decline and export activity picks up, matching the United States for the fastest growth among the Group of Seven nations. Inflation is projected to meet the Bank of Canada’s 2 percent target by the end of 2025, down from the current 2.5 percent annual rate.
This shift in expectations coincides with changing predictions for the Federal Reserve, where Chair Jerome Powell is also expected to ease monetary policy in September.
Earlier this month, market participants began to price in faster and deeper rate cuts in Canada after US data indicated a quicker-than-expected slowdown in the labour market.
Given the close economic ties between the US and Canada, a slowdown in the US economy is likely to impact Canada as well.
With the Federal Reserve expected to lower rates, Macklem has more room to normalize borrowing costs without moving ahead of the Fed, avoiding potential negative effects on the Canadian dollar.
The changing global rate outlook could also benefit Prime Minister Justin Trudeau and Canadian fiscal policymakers, who are grappling with declining poll numbers and higher debt service costs.
Yields on 10-year Canadian government bonds, which significantly affect federal interest costs, are expected to average around 3 percent over the next year, compared to over 3.25 percent in the previous July survey.
The August survey, conducted from the 16th to the 21st, included responses from 26 economists.
