The Bank of Canada (BoC) is expected to lower its overnight interest rate by 25 basis points at its September 4 meeting, marking the third consecutive rate cut this year. According to a recent Reuters poll of economists, the central bank is also anticipated to implement further rate reductions in October and December, signaling a faster pace of monetary easing than previously forecasted.
The decision to cut rates follows a decline in inflation to a 40-month low of 2.5% in July, approaching the BoC’s target of 2%. Additionally, ongoing weakness in the labor market suggests that more monetary easing is on the horizon.
After maintaining the interest rate at a 23-year high of 5.00% for nearly a year, the BoC began reducing rates by 25 basis points in June and July, ahead of similar actions expected from the U.S. Federal Reserve. At the July monetary policy meeting, BoC Governor Tiff Macklem indicated a shift in focus towards supporting economic growth rather than solely combating inflation.
All 28 economists surveyed between August 27-29 expect the BoC to lower its key rate to 4.25% in September. Furthermore, approximately 70% of those surveyed predict additional rate cuts in October and December, bringing the rate to 3.75% by year-end. While some economists anticipate the rate will remain at 4.00%, only one forecasts a reduction to 3.50%.
This represents a shift in expectations from a previous July survey, where nearly 90% of economists projected the rate to be 4.00% or higher by the end of the year.
“The Bank of Canada is likely to cut rates next week and maintain a dovish stance due to the weaker condition of the Canadian economy compared to the U.S.,” said Taylor Schleich, a rates strategist at National Bank of Canada. “We expect further cuts in October and December, with additional reductions likely in early 2025.”
Three of Canada’s five major banks are forecasting a total of five rate cuts in 2024.
The upcoming release of Q2 GDP data on August 30 will be crucial, with the economy expected to have grown at an annualized rate of 1.6%, lower than Statistics Canada’s preliminary estimate of 2.2% and Q1’s growth of 1.7%.
If the poll’s predictions hold true, the BoC will have reduced rates by 75 basis points before the U.S. Federal Reserve begins its rate cuts, which are expected to start later this year.
Despite the anticipated rate cuts, the Canadian dollar has strengthened by about 3.0% in August, reaching a five-month high against the U.S. dollar and helping to mitigate the risk of imported inflation.
Looking ahead, the BoC is projected to cut interest rates by a total of 100 basis points next year, bringing the rate down to 2.75% by the end of 2025, slightly lower than the 3.00% predicted last month.