Expectations for interest rate cuts in Canada continue looking into 2025, with a 50-basis point (bps) rate cut this week priced at 85 per cent.
But the pace is expected to slow with less than three more 25-bps rate cuts in 2025.
The primary catalyst is the weakening labour market outlook and to some degree a rebound in inflation risks.
We maintain that the massive debt and deficits will make monetary policy far more challenging in the decades ahead than in the decades past.
The data from Statistics Canada since the 1970s shows the average unemployment rate in Canada was about eight per cent (blue dash) with the percentage of the population in the workforce around 65.75 per cent (red dash).
Since the 2000s, the unemployment rate has been closer to the seven per cent level, so at the current 6.8 per cent, we are not far off.
The concern for the Bank of Canada (that does not have the same dual mandate as the U.S. Federal Open Market Committee) is the recent trend moving higher with a falling participation rate.
Recent gross domestic product (GDP) numbers in Canada have been a bit better than expected, but Canada is still underperforming potential GDP (the output gap).
Recent inflation numbers have started to move up again. Part of that move is a weaker currency and part of it is that wage costs are running in the four to five per cent range.
The Bank of Canada’s neutral policy rate is in the 2.75 per cent range with a 50-bps range. A 50-bps rate cut will push the headline rate to the top end of the target range.
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