The latest inflation data from July has economists predicting that the Bank of Canada will issue its third interest rate cut in September. Annual inflation slowed to 2.5 per cent, the lowest level since March 2021, moving closer to the central bank’s two per cent target. Money markets and economists anticipate rate cuts of 25 basis points at each of the central bank’s remaining monetary policy decisions in 2024. This would bring the benchmark policy rate below four per cent by the end of the year. Forecasts for the speed at which the Bank of Canada will adjust its policy rate after the recent rapid tightening cycle have accelerated.
In June, when the central bank delivered its first rate cut in over four years, Governor Tiff Macklem indicated a gradual pace of easing. Some predictions suggested an interest rate cut at every other meeting for the rest of 2024. The Bank of Canada has emphasized a meeting-by-meeting approach to interest rates, evaluating data to determine if it is appropriate to cut without reigniting inflation. Despite expectations of a lower policy rate, they maintain they are not on a predetermined path. However, TD Bank’s James Orlando notes that the backdrop surrounding the rate path has changed significantly since June.
The Bank of Canada initially showed concern that if it eased off on rate hikes too early, inflation relief might stall before returning to two per cent. Recent communications from the central bank indicate growing worries that inflation could drop below two per cent, impacting price stability. Inflation is currently well behaved in both Canada and the United States, with expectations that the U.S. Federal Reserve may start its rate cut cycle soon. A recent weak jobs report in the U.S. and a rise in unemployment in Canada have heightened concerns about a potential recession.
The Bank of Canada’s governing council is concerned about further deterioration in the labor market, which could delay economic recovery. Fears have shifted from inflation not reaching two per cent to worries that the economy may suffer larger setbacks than initially anticipated. TD Bank estimates that the Bank of Canada has room for interest rates to fall without risking inflation progress. Experts expect the central bank to continue with 25-basis-point interest rate cuts instead of larger adjustments.
Despite the cracks in the Canadian economy, experts do not foresee the Bank of Canada making significant changes in its easing path. Wage growth remains a concern, and the central bank may continue with gradual rate cuts to avoid triggering inflationary pressures. Economists expect the Bank of Canada to lower its policy rate to four per cent by the end of 2024 and anticipate a series of rate cuts in 2025 as well. Ultimately, the central bank’s decisions will be influenced by a variety of factors, including domestic economic conditions, inflation levels, and global market trends.
