Economists debate the pace of rate cuts as weak growth and labour market concerns shape policy decisions
The Bank of Canada is expected to continue cutting its benchmark interest rate, though the pace of future cuts remains uncertain.
A report by Financial Post suggests a quarter-point reduction is likely on Sept. 4, with the possibility of a larger cut in October. While most economists and markets believe a 50-basis-point cut is unlikely during this cycle, some argue the chances of a bigger reduction are increasing.
Stephen Brown, deputy chief North America economist at Capital Economics, noted that while the economy grew more than anticipated in the second quarter, growth slowed significantly in May and June. He suggested that this slowdown could result in a weaker-than-forecast third quarter.
“That raises the chance of the bank enacting a 50bp cut during this cycle, although the pace of policy loosening will still be dependent mainly on the inflation data,” Brown said.
Royce Mendes, managing director and head of macro strategy at Desjardins Group, emphasized the urgency for the Bank of Canada to lower rates ahead of a mortgage renewal wall.
Desjardins forecasts 25 bps cuts at each of the bank’s next six meetings, followed by a pause and further cuts until the rate reaches 2.25 percent by the end of 2025. “While that was previously seen as a very dovish forecast, the risk now is that rates fall faster to that terminal level,” Mendes said.
Mendes also highlighted a shift in central bank focus, not only in Canada but globally, towards deteriorating labour markets. He suggested that with inflation largely under control, there’s an increasing likelihood of a 50bp rate cut before the end of the year.
Citigroup economists have similarly called for a 50 basis-point cut in October, according to Bloomberg.
Upcoming economic data will play a critical role in shaping the Bank of Canada’s decisions, with Friday’s labour market reports from both Canada and the United States being particularly significant.
MortgageLogic.news analyst Robert McLister commented on the importance of these reports: “Friday’s job numbers have maximum importance because, if they’re feeble again, the BoC may have no choice but to cut 50 bps at an upcoming meeting.”
McLister also noted that there is a 21 percent implied chance of a 50bp cut occurring this Wednesday.
