THE BANK OF CANADA – WHAT WILL BE THEIR NEXT MOVE?

On October 23, 2024, the Bank of Canada announced a significant interest rate cut of half a percentage point, signalling a proactive approach to stimulating the Canadian economy as inflation indicators show signs of stabilization.

With the policy rate now set at 3.75%, this marks the fourth consecutive reduction since June and represents the largest rate cut by the Bank of Canada since the global financial crisis of 2009, excluding the measures taken during the COVID-19 pandemic. This move reflects the central bank’s commitment to fostering economic growth and ensuring a resilient financial landscape for Canadians. The Bank of Canada has expressed optimism regarding its recent monetary policy adjustments, particularly noting a strategic retreat in October as inflation has successfully returned to the target of 2%. This careful management aims to maintain inflation close to this goal. Following the interest rate cut in September, it’s encouraging to see that inflation has not only stabilized at the Bank’s 2% target but has also dipped to an impressive 1.6% in the latest report.

Looking ahead, the Bank of Canada’s updated perspective suggests that inflation is likely to remain around the 2% mark shortly, with allowances for some fluctuations within the healthy range of 1 to 3%. With inflation largely under control, the central bank is now shifting its focus to addressing some of the challenges visible in the Canadian labour market and the overall economy. While the unemployment rate currently stands at 6.5%, there is an opportunity for growth, particularly as the economy adjusts to recent conditions that have fallen short of the central bank’s earlier projections for the third quarter. The Bank of Canada believes that lowering the policy rate can play a crucial role in fostering economic growth. By making it easier for Canadians and businesses to spend and invest, these reductions could contribute to a vibrant and thriving economic landscape.

If the economy continues to develop in accordance with the central bank’s forecasts, further interest rate cuts may be anticipated. This strategy aims to enhance demand and ensure that inflation remains within the desired range. The central bank has revised its real gross domestic product growth expectation for this year to 1.8%, slightly down from 2%. However, the longer-term outlook remains quite positive, with the Bank of Canada projecting real GDP to grow at an annual rate of 2.3% for both 2025 and 2026.

Financial markets are currently anticipating a 25-basis-point cut in December, with a 25% chance of a further reduction of 50 basis points by that time, as reported by Reuters on October 23. The bank’s director of economics acknowledged that the timing of the next rate cut remains uncertain. While forecasts suggest a modest quarter-point cut, any underperformance in inflation or job data could encourage the Bank of Canada to consider a more significant adjustment. The discussion suggests that the central bank’s lack of forward guidance may be a strategic choice. However, TD Bank has indicated a clear path forward, projecting an additional 150 basis points of easing over the next year.

While there’s some uncertainty regarding the Bank of Canada’s future actions, the prevailing expectation is a continued downward trend in interest rates. Whether the decreases will be 25, 50, or even 75 basis points remains to be seen, but the important takeaway is that rates are on track to decrease, aligning with the necessary direction for economic support.