Forecasters anticipate the Bank of Canada will cut interest rates by 50bps to address slowing growth
The Bank of Canada is expected to speed up its interest rate cuts, with forecasters predicting a half-percentage point reduction this week, according to BNN Bloomberg.
This expectation follows the significant drop in inflation, with Statistics Canada reporting that the annual inflation rate fell to 1.6 percent in September, below the Bank of Canada's target of 2 percent.
Chris McHaney, EVP and head of Investment Management and Strategy at Global X Investments Canada Inc., one of the Best Wealth Management Firms to Work for in Canada, told Wealth Professional that after a series of three 25 basis point cuts, the Bank of Canada is poised to increase the pace by cutting another 50 basis points this week.
He noted that Canada's GDP growth has been consistently below 1.5 percent year-over-year since March 2023, in stark contrast to the stronger growth in the US.
“Economic growth in Canada has been much slower than in the US,” McHaney said, adding that core inflation in Canada remains sticky but has dropped to 2.3 percent, its lowest since early 2021.
Ashish Dewan, investment strategist at Vanguard Canada, also gave his insights to Wealth Professional ahead of the rate decision, indicating that they foresee “one or two additional quarter-point rate cuts this year,” which would place the overnight rate between 3.75 and 4 percent by year-end.
Dewan cited the easing of inflationary pressures, weaker labour market conditions, and below-trend GDP growth as clear indicators that policy cuts are necessary. He highlighted how the population growth outpaced job creation, worsening the economic outlook.
On the broader inflation picture, recent data from Statistics Canada showed that the annual inflation rate for September tumbled to 1.6 percent — falling below the Bank of Canada’s target of 2 percent for the first time since February 2021.
Nathan Janzen, assistant chief economist at RBC, told BNN Bloomberg that the latest consumer price index report reinforced his expectation for a “supersized rate cut,” noting that the economy is underperforming despite inflation being under control.
“So that makes it a pretty straightforward argument to continue cutting interest rates,” he added.
The Canadian economy, while still growing modestly, has shrunk on a per-capita basis for five consecutive quarters. The labour market has also loosened, with the unemployment rate reaching 6.5 percent in September, up from 5.5 percent a year earlier.
This deteriorating economic backdrop has prompted many forecasters, including the parliamentary budget officer, to project that the Bank of Canada will continue cutting rates, with the policy rate expected to reach 2.75 percent by mid-2025.
Carl Gomez, chief economist at CoStar, told BNN Bloomberg that Canada’s real interest rates — adjusted for inflation — remain much higher than in other countries, exacerbating the country’s economic challenges.
“We are dealing with a far weaker economy in Canada than the United States,” Gomez said. This disparity, he suggested, is another reason why the Bank of Canada is “behind the curve” when it comes to easing policy.
The interest rate cuts, while intended to provide economic relief, have raised concerns about the housing market. McHaney pointed out that despite falling interest rates, the Canadian housing market remains tepid, with rising home listings but limited demand.
Gomez echoed this sentiment, noting that while the market has shifted towards buyers, house prices remain relatively high, keeping affordability issues in focus. “It’s turned into more of a buyer’s market,” Gomez explained, but house prices are still expensive for many prospective homebuyers.
The Bank of Canada’s rate cuts are expected to continue into 2025, with further easing measures being introduced depending on how inflation and economic growth trends evolve.
The central bank’s monetary policy report, which will be released alongside its rate decision, is expected to provide new economic forecasts that will shape expectations for the months ahead.
