More Bank of Canada Rate Cuts Expected in the Future

The Bank of Canada lowered interest rates at its third consecutive meeting Wednesday, and economists say investors, consumers, and businesses can expect more cuts ahead. The main debate now is how often and how far rates will come down.

While overall economic growth in Canada remains healthy, the focus is on cooling inflation pressures against a backdrop of a softening labor market. On Wednesday, the Bank of Canada announced it had cut its key policy rate to 4.25% from 4.50%. In early June, before the central bank began cutting rates, the overnight rate had stood at 5% since July 2023.

Bank of Canada governor Tiff Macklem signaled a bias toward continued cuts ahead. “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate,” she said in the bank’s announcement.

Here’s what three economists think will come next.

Joseph Briggs, Economist, Goldman Sachs

“Given our forecast for a further moderation in inflation and our view that growth will remain positive but below potential in the near term, we think the BoC will continue to ease policy with 25bp cuts at a per-meeting pace until reaching a terminal rate of 2.75% in June 2025.

“In the Q&A, Macklem indicated that there was a strong consensus around a 25bp, cut but also noted that the Governing Council discussed scenarios where it might be appropriate to slow the pace of declines or to cut by more than 25bp. When pressed on why the BoC did not cut 50bp, Macklem emphasized that the BoC had cut three times and that inflation remains above target, but acknowledged that the BoC was prepared to cut by 50 bp if called for by incoming data.”

Douglas Porter, CFA, Chief Economist, BMO

“We expect the Bank to continue grinding down rates in coming meetings, and, while we anticipate a series of 25 bp steps into early next year, we certainly will not rule out a possible 50 bp step at some point. That’s especially true if CPI behaves and/or the unemployment rate takes another big step up. And the reality is that the jobless figures have quickly become equally as important as the inflation data in the Bank’s decision making. For now, we look for the Bank to cut rates to 3.5% by January, and then to 3.0% by next June, but the risks tilt to the Bank going faster than that, and potentially further.”

Ashish Dewan, Senior Investment Strategist, Vanguard Canada

“Given the dovish posture of the BoC, inflation approaching target and softening labor market, we expect one or two more 25 bps cuts in 2024.

“The Monetary Policy Report in July has revised down GDP growth forecast to 1.20% from 1.50% in 2024 (our forecast is 1.25-1.50%). There was a downward revision in June GDP numbers and a lower GDP estimate for July despite recent completion of the Trans Mountain pipeline which contributed to rising energy export volumes. GDP rose by 2.1% annualized in the second quarter driven by a strong rise in government spending (contributed 80% to GDP growth) and a rebound in aircraft and transportation equipment. GDP growth per capita is still negative and consumer spending and household spending have stalled to 0.6% and 0.8% respectively.

“MPR statement indicated that inflationary pressures continue to ease, and preferred core measures have been below 3% for several months. MPR statement also acknowledged sticky services (particularly shelter inflation). The ongoing excess supply is lowering inflationary pressures, although this is partly offset by continued strength in categories like shelter and wage-sensitive services. We foresee continued progress in the inflation fight this year amid below-trend growth and still-restrictive monetary policy. We foresee core inflation ending 2024 in a range of 2.1%–2.4% on a year-over-year basis.”

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