More Rate Cuts Expected Following Jumbo Bank of…

The Bank of Canada delivered a widely anticipated half-point cut to its overnight interest rate, bringing the policy rate to 3.75% from 4.25%, offering more good news for Canadian borrowers.

While markets and economists expected the Bank to cut rates, the move signals its urgency in tackling the nation’s economic challenges. Observers believe this means investors should expect more rate cuts in the months to come. Here’s what some Canadian economists had to say about Wednesday’s rate cut.

Stephen Brown, Deputy Chief North America Economist at Capital Economics

“The weak economic backdrop means there is a strong case for the Bank of Canada to follow its larger 50-basis-point cut today, which took the policy rate to 3.75%, with another 50bp move at the next meeting in December.

“Our forecast for a 50bp cut was a non-consensus call when we made it, but in the end, the Bank’s decision to accelerate its loosening cycle came as little surprise, with markets pricing in more than a 90% chance of the move ahead of the decision. The accompanying policy statement highlighted that the decision reflected the fact that inflation is ‘now back around the 2% target,’ while the economy ‘continues to be in excess supply’ and the ‘labor market remains soft.’

“The new Monetary Policy Report shows that the Bank now shares our view that third-quarter GDP growth was below the economy’s potential, at 1.5%, and the Bank now expects only a modest pickup to 2.0% in the fourth quarter, which would be in line with potential at best.

“Accordingly, it seems unlikely to us that the 50bp cut today will be a one-off. The Bank seemed to leave the door open to another larger move, although it was noncommittal, noting that ‘if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further.’ With little sign that economic growth is accelerating enough to close the output gap, and assuming further encouraging CPI data releases, we continue to expect another 50bp cut from the Bank in December.

“That would take the policy rate to 3.25% by year-end, the top end of the Bank’s 2.25%-3.25% neutral range estimate, after which we would expect the Bank to revert to 25bp cuts until the policy rate reaches 2.25% in mid-2025 – although the risks to that terminal rate forecast now seem to lie to the downside.”

Avery Shenfeld, Chief Economist, CIBC

“An outsized rate cut was a no-brainer, and the simple message from the Bank of Canada is that there’s more to come if events unfold as expected. Based on the logic offered to justify today’s decision, it would take a significant turn of events to stand in the way of another cut of that magnitude in December.

“That said, as has been its practice of late, the Bank has kept its options open by not signaling anything specific about the size of individual rate cuts ahead. The statement plants a victory flag in the battle against inflation, which is now definitively expected to run around the 2% target, with a couple of ticks shaved off the inflation forecasts ahead being the only major change in the Bank’s projections.

“While the Bank sees better times ahead in the next two years, with growth averaging 2.2%, that isn’t by any means ruling out further interest rate relief, as softer monetary conditions are cited as the driver for the improvement. There’s really nothing in today’s announcement that should raise eyebrows in markets.”

Philip Petursson, Chief Investment Strategist, IG Wealth Management

“In this era of transparency, sometimes the Bank of Canada primes the market ahead of a policy move and sometimes the market primes the Bank. Today, we saw the Bank of Canada give the market what it has been pricing in for the past few weeks with a 50-basis-point cut. It was as expected, and for good reason.

“It has been the case for a couple of months now that the BoC’s fight against inflation has been won. With the most recent [inflation] print of 1.6%, the Bank needs to consider the risk of undershooting its inflation target. As such, a return of the overnight rate to neutral as soon as possible should be the objective. We believe the neutral rate will fall between 2.5% and 3.0%.

“Rapid rate cuts become even more apparent when considering the massive mortgage cliff approaching in 2025 where approximately 25% of mortgages come due for renewal. Mortgage borrowers will have to make trade-offs – spend more on your mortgage might mean spending less elsewhere – that’s an economic headwind.

“Depending on how the Canadian data rolls out in the next two months, this may not be the last 50-basis-point cut the Bank makes.”

Ashish Dewan, Investment Strategist, Vanguard Canada

“The BoC’s decision to cut the monetary policy rate by 50 basis points was in line with market expectations. Inflationary pressures have eased as headline inflation slowed to 1.6%. The labor markets, in our view, remains weak despite a stronger than expected September report, as lower labor participation largely contributed to a decline in unemployment from 6.6% to 6.5%. The rate cut could help growth get back to trend sooner. We do not expect another cut in December but anticipate further easing in 2025.”

Benjamin Reitzes, Managing Director, Canadian Rates & Macro Strategist, BMO

“The Bank of Canada statement was straightforward, with the key takeaway [from Governor Tiff Macklem’s opening statement] that ‘Overall, we view the risks around our inflation forecast as reasonably balanced.’

“There were no changes on the quantitative tightening front. The Bank acknowledges the softness in growth and slowing inflation as the rationale for the 50-basis-point move. However, with the risks balanced and outlook for inflation to hover around 2%, they don’t seem in a rush to cut 50 basis points again in December. Rather, it will take another round of worse-than-expected data to prompt another big cut.

“More cuts are coming, but the pace will be decided by the data. If the economy and inflation weaken further, another 50-basis-point [cut] will be on the table in December. If it’s close to the Bank of Canada’s forecast, a path of cutting 25 basis points per meeting looks likely into the middle of 2025.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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