Bank of Canada to be more aggressive with rate cuts, economists say

The Bank of Canada is expected to take a more aggressive approach to cutting interest rates over the next year, with economists predicting deeper and faster reductions as inflation eases.

Economists surveyed by Bloomberg forecasted the central bank to lower its key overnight rate for the third time in a row at its meeting on September 4, bringing it down to 4.25%.

The poll showed that this may be just the beginning of a broader trend, with the Bank anticipated to slash rates from the current 4.5% to 3% by July 2024. By 2026, the rate could settle around 2.75%, according to the survey.

The consensus suggested that the Bank of Canada is positioning itself to ease borrowing costs more quickly than previously anticipated. The shift comes as inflation pressures begin to subside, allowing for a return to less restrictive monetary policies.

Market traders are already betting on over 150 basis points of cuts by next summer, which would bring rates closer to a neutral level – one that neither stimulates nor restricts economic growth.

This anticipated easing is seen as key to achieving what many hope will be a "soft landing" for Canada’s economy, a scenario where growth slows just enough to curb inflation without tipping into a recession.

Economists projected that Canada’s economy will grow by 1.7% in 2025, matching the US for the fastest growth among the G7 countries, while inflation is expected to hit the Bank of Canada’s 2% target by the end of 2025.

The expected rate cuts are also influenced by developments in the United States, where Federal Reserve chair Jerome Powell is predicted to begin lowering rates in response to a weakening labour market.

 Given the close economic ties between Canada and the US, a slowdown in the American economy is likely to have a ripple effect north of the border, making it easier for the Bank of Canada to justify rate cuts.

This global shift towards lower rates could provide some breathing room for prime minister Justin Trudeau’s government, which has been under pressure due to rising debt service costs and declining poll numbers.

The poll indicated that yields on 10-year Canadian government bonds are expected to average around 3% over the next year, down from over 3.25% in July, which could help alleviate some of the fiscal pressures.

CMP

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