The Bank of Canada (BoC) is anticipated to lower its overnight interest rate by 25 basis points to 4.50% this Wednesday, according to a Reuters poll of economists. This move comes amid expectations that inflation will continue to decline.
With the Canadian economy slowing and unemployment slightly rising, the central bank is projected to implement two additional rate cuts in 2024. However, only a slim majority of economists predict a policy rate of 4.00% by the year’s end, with the risks skewed towards fewer rate cuts.
Despite predictions for at least three rate cuts from the BoC in 2024, the possibility of a fourth reduction remains uncertain, particularly because the U.S. Federal Reserve has not yet begun to lower its rates.
Canadian inflation has eased within the BoC’s target range of 1%-3%, partly due to a weakening job market and a softening corporate outlook. However, persistent core inflation and wage growth might necessitate caution.
Nearly three-quarters of the economists surveyed between July 16-19, or 22 out of 30, expect the BoC to reduce its policy rate to 4.50% on July 24, aligning with interest rate futures pricing.
Last month, the Canadian central bank made its first rate cut in four years. The BoC is expected to pause its easing cycle at its September meeting, resuming cuts in October and December. This indicates that the BoC will likely cut rates twice before the U.S. Federal Reserve begins its easing cycle, expected in September.
Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, noted that second-quarter CPI inflation is tracking below the BoC’s April forecast, and the business outlook survey was highly dovish. “The pieces are in place for the BoC to cut rates again at its meeting next week,” he said.
Inflation Risks and Future Cuts
While inflation, measured by the annual change in the consumer price index, is expected to ease in the coming quarters, staying around 2% through this year and 2025, economists warn of potential higher price pressures.
“Additional rate cuts beyond the one we see in July will require inflation decelerating from what we’ve seen in the last few months. We do expect it will happen,” Kelvin added.
After July, the BoC is anticipated to cut its policy rate two more times this year, aiming for 4.00% by the end of 2024. Among the economists polled, 16 out of 30 predict this rate, while 10 foresee a rate of 4.25% or higher, and only four predict it will reach 3.75%.
All five major Canadian banks expect a total of four rate reductions this year.
The Canadian central bank may gain more confidence if the housing market, which has seen declining average home prices, remains stable. Homeowners are currently facing higher mortgage payments compared to the rock-bottom rates during the COVID-19 pandemic.
“The BoC has been clear that it intends to ease policy only gradually, and we think it will remain more concerned with upside risks to inflation than downside ones in the near term,” said Tony Stillo, director of Canada economics at Oxford Economics. “If inflation fails to slow, as we expect, or house prices rebound too quickly, the BoC may delay further easing and hold the policy rate higher for longer.”
Nearly 70% of economists in the poll, 11 out of 16, indicated that the end-2024 overnight rate is more likely to be higher than they currently expect, while five said the opposite.
Canada’s economic growth is forecasted to average 1.0% this year before rebounding to 1.8% in 2025.
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