(Bloomberg) -- Economists see the Bank of Canada cutting interest rates for a third consecutive meeting next week, continuing what’s anticipated to be a steady downward trend in borrowing costs over the next year as inflation eases.
Policymakers led by Governor Tiff Macklem are expected to lower the benchmark overnight rate to 4.25% at their Sept. 4 meeting, according to the median estimate in an August poll conducted by Bloomberg.
Economists are also forecasting faster and deeper cuts to borrowing costs over the next year, and see the central bank reducing the policy rate from the current 4.5% to 3% by next July. In 2026, the overnight rate is expected to average 2.75%, the data show.
The survey results show analysts’ outlook aligning with market expectations for a gradual return to less restrictive monetary policy — traders in overnight swaps are also betting Macklem will deliver more than 150 basis points of easing by next summer. That would bring the bank’s policy stance closer to the so-called neutral rate — where borrowing costs neither stimulate nor restrict economic growth.
Macklem’s coveted soft landing is also still the base case scenario, economists say, with Canada’s economy expected to grow 1.7% in 2025 as interest rates start easing and export growth ramps up. That matches the US for the fastest pace of growth in Group of Seven countries. Inflation is forecast to reach the bank’s 2% target by the end of 2025, from the current 2.5% yearly pace.
The shift in outlook comes amid changing bets for the path for the Federal Reserve, where Chair Jerome Powell is seen joining the global trend in loosening monetary conditions in September. Earlier this month, markets had started to price faster and deeper cuts in Canada after US data showed the labor market weakening more quickly than anticipated.
The two countries’ economies are deeply intertwined, and a slowdown in the US is likely to trickle through to Canada. With the Fed set to cut, Macklem can keep normalizing borrowing costs without worrying about moving too far ahead of the Fed and risking consequences for the loonie — a re-convergence of the two countries’ policy stances.
The shifting global outlook for rates also carries some positive news for Prime Minister Justin Trudeau and the country’s fiscal policymakers, who are struggling in the polls and facing elevated debt service costs. Yields on 10-year Canadian government bonds — an important component of the federal government’s interest costs — are expected to average about 3% over the next year, compared with over 3.25% in the July survey.
The survey of 26 economists was conducted Aug. 16-21.
--With assistance from Jay Zhao-Murray.
©2024 Bloomberg L.P.
