Economists anticipate that the Bank of Canada will continue its pattern of reducing interest rates, with a third consecutive cut expected at next week’s meeting. This trend is forecasted to persist throughout the year as inflation continues to decrease.
In an August survey conducted by Bloomberg, policymakers led by Governor Tiff Macklem are projected to lower the benchmark overnight rate to 4.25% at their meeting on September 4. The survey also suggests that deeper and more rapid rate cuts are on the horizon, with predictions that the policy rate will drop from the current 4.5% to 3% by July next year. By 2026, the overnight rate is expected to average around 2.75%.
These forecasts align with market expectations for a gradual return to a less restrictive monetary policy. Traders in overnight swaps are betting that Macklem will implement over 150 basis points of easing by next summer, bringing the bank’s policy closer to the neutral rate, where borrowing costs neither stimulate nor hinder economic growth.
Economists remain optimistic that Macklem’s goal of achieving a soft landing for the Canadian economy is still achievable. The country’s economy is expected to grow by 1.7% in 2025 as interest rates decrease and export growth accelerates, matching the United States for the fastest growth rate among the Group of Seven countries. Inflation is predicted to reach the bank’s 2% target by the end of 2025, down from the current annual rate of 2.5%.
This change in outlook coincides with a shift in expectations for the Federal Reserve, where Chair Jerome Powell is also expected to ease monetary conditions in September. Earlier this month, markets began pricing in faster and deeper rate cuts in Canada after U.S. labor market data showed signs of a quicker-than-expected slowdown. Given the close economic ties between the U.S. and Canada, a slowdown in the U.S. is likely to impact Canada as well. With the Federal Reserve set to cut rates, Macklem can continue to normalize borrowing costs without the risk of moving too far ahead of the Fed and affecting the Canadian dollar.