(Bloomberg) -- The Bank of Canada is likely to cut interest rates for a third consecutive meeting, as officials try to engineer a soft landing for the economy and inflation worries fade.
Markets and economists widely expect policymakers led by Tiff Macklem to lower the benchmark overnight rate to 4.25% on Wednesday. The key question is whether officials will talk about the longer-range outlook, now that the US Federal Reserve is ready to move and forecasters are expecting a series of rate cuts stretching well into next year.
Economists surveyed by Bloomberg see the Bank of Canada cutting by a quarter percentage point at each of the next five meetings, with the policy rate falling to 3% by the middle of 2025. That would put it within the bank’s so-called neutral range, the estimated level as which interest rates neither slow nor stimulate the economy.
“We know the economy is weakening persistently and they’ve got to do something at this point to get rates down,” Claire Fan, an economist with the Royal Bank of Canada, said in an interview. “There’s simply no need for rates to be as elevated as they are.”
In June, Macklem became the first Group of Seven central banker to launch into monetary easing, and the bank cut interest rates again in July. But he has insisted rates are not on a predetermined path, and that each decision will be guided by data.
Still, officials have signaled that it’s “reasonable” to expect further cuts if yearly price increases keep decelerating. Inflation has been within the bank’s 1% to 3% control range for seven months and hit 2.5% in July. Core measures are slowing too, and the breadth of price increases has narrowed.
The bank has confirmed it’s starting to focus more on downside risks to the economy. In a summary of deliberations from the July meeting, officials said they spent “considerable” time discussing the country’s weakening labor market.
Since July, it’s also become clearer that the Federal Reserve will soon lower rates. That should help to thwart worries about Macklem moving too quickly ahead of Canada’s largest trading partner, a scenario that risked pressure on the loonie.
Traders in overnight swaps have more than fully priced a quarter-point cut on Wednesday, and put the odds at less than 10% that policymakers opt for a cut of 50 basis points. The latter would likely shock markets and suggest the Bank of Canada sees deeper economic problems underneath the surface. It “would create more panic than they necessarily need to at the moment, especially given how jittery markets have been,” Fan said.
Still, some economists think the Bank of Canada may carefully open the door to the possibility of bigger cuts. And while Macklem isn’t likely to declare victory over inflation, he may emphasize labor market or economic weakness, while dialing back his words of concern about price pressures.
“I would say that there’s room for the communications to be more dovish,” Royce Mendes, managing director of macro strategy at Desjardins Securities, said in an interview. “Inflation is now more of a back-burner issue for the Bank of Canada. And employment should take center stage.”
Canadian consumers are feeling the pinch of higher borrowing costs, and per-capita household consumption is falling at a pace usually seen in recessions. Overall growth has been propped up by record immigration, and there’s a wave of mortgages that are set to renew at much higher levels.
But economists aren’t expecting mass layoffs. While the jobless rate has risen to 6.4%, from 5% at the beginning of last year, it’s not forecast to rise much higher than a 6.7% peak at the end of 2024, according to the median estimate in a Bloomberg survey of economists.
Canada’s economy grew at a 2.1% annualized pace in the second quarter, but much of the growth was driven by government spending, and early indications are it will be slower in the third quarter.
The rate decision will be released at 9:45 a.m. Ottawa time on Wednesday, and Macklem and Senior Deputy Governor Carolyn Rogers will speak to reporters at 10:30 a.m.
--With assistance from Jay Zhao-Murray.
©2024 Bloomberg L.P.