Twice as nice: The Bank of Canada brings a double dose of rate cuts…with more still to come

Today, the Bank of Canada delivered a larger-than-usual 50 basis point rate cut that financial markets, businesses and consumers were hoping for. At this point in the cycle, inflation pressures have largely subsided and the weak economic fundamentals in Canada’s economy are clearly showing. Looking ahead, we see little reason for the Bank to slow down this more aggressive pace of cuts at the next few announcements.

• Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

• The Bank of Canada cut its policy rate by an outsized 0.5% to 3.75. This move was expected by most in the context of:
  • inflation now below target
  • inflation expectations by businesses and consumers finally settling down; and
  • economic growth below its potential and below the Bank’s forecast. In fact, financial markets had priced in an 85% chance of this size rate cut before the announcement.
• Canada’s economy remains weak, in excess supply with a soft labour market. While there’ve been minor adjustments to short-run dynamics, the Bank’s bigger-picture forecast for Canadian real GDP is largely unchanged over the projection (at 1.2% in 2024 and 2.1% in 2025). Business demand to hire is subdued, much like consumer spending, which has been declining on a per person basis.
• Canada’s inflation outlook marked down modestly: In recent months, headline inflation has come down faster than expected ─ partly due to lower global oil prices. As such, the Bank’s inflation outlook was revised down slightly (by 0.1 ppts and 0.2 ppts in this year and next respectively), although the forecast remains marginally above the 2% target for 2025 as a whole.
• Looking ahead: The bigger picture worry is that the Bank has fallen behind the curve. Even with today’s 50 basis point cut, interest rates remain restrictive. As such, there’s a growing risk that the accumulating economic weakness could cause Canadian inflation to undershoot its target. There are also some potential downside economic shocks on the horizon, including the outcome of the upcoming U.S. election and a potentially sharp slowdown in immigration to Canada. Canadian markets are currently split, pricing in ~50% chance of another larger cut at the Bank’s next rate announcement in December. Meanwhile, in the U.S. ─ where the economy has performed much better ─ markets expect the Federal Reserve to shift down to 25 basis point cuts going forward.

BANK OF CANADA PROJECTIONS