Economists Predict Two Rate Cuts Amid Falling Inflation
Two-and-a-Half Rate Cuts Predicted as Inflation Cools
Economists are increasingly anticipating a significant shift in the Bank of Canada’s monetary policy, with predictions mounting for two-and-a-half key rate cuts over the coming months. The latest inflation data, released by Statistics Canada, showed a year-over-year increase of 1.6 per cent in September, marking the slowest pace of inflation in over three years and well below the Bank of Canada’s target of two per cent. This deceleration in price growth is fueling optimism among analysts and economists who believe the BoC is poised to accelerate its easing of monetary policy.
The Statistics Canada report highlighted several key factors contributing to the downward trend. The share of components rising by more than five per cent fell to 11 per cent, the lowest level since September 2020 and down from 13 per cent in August. Furthermore, monthly inflation contracted 0.4 per cent in September, suggesting a downward trend in the three-month annualized change, bringing it close to the Bank of Canada’s target range. Despite this encouraging news, core inflation, comprised of the Bank of Canada’s preferred measures — CPI trim and CPI median — remained steady at 2.35 per cent, unchanged from August. This persistent core inflation indicates underlying price pressures within the economy, tempering some of the enthusiasm for aggressive rate cuts.
Several economists are predicting a substantial shift in the Bank of Canada’s approach. Charles St-Arnaud, chief economist at Alberta Central credit union, forecasts two-and-a-half 50-basis-point cuts, one next week and another in December, followed by a 25-basis-point cut in January to bring the benchmark lending rate to three per cent, and close to neutral territory. He argues that the data confirms a reduced intensity of upside price pressures and suggests the Bank of Canada should prioritize returns to a more neutral monetary policy, considering the sluggish economy and lack of inflationary drivers.
Other experts share this view. Karl Schamotta, chief market strategist at Corpay Inc., noted that underlying pressures remained “sticky,” despite the overall decline in reported inflation. He believes the Bank of Canada is “well behind the curve” when it comes to rate cuts and that the latest inflation data, coupled with the “sluggish” growth in 2024, warrants a more proactive approach. Tu Nguyen, an economist at RSM Canada LLP, echoed this sentiment, suggesting the Bank of Canada should speed up its rate cuts, particularly as the main concern has shifted from price stability to jobs and growth.
The labour market data released alongside the inflation figures further supported these predictions. The economy created more than double the expected number of positions, and the unemployment rate fell to 6.5 per cent from 6.6 per cent. However, economists pointed out that the details behind this strong jobs report, including a falling participation rate, raised concerns about the sustainability of the labour market’s strength. Even with the slowing of inflation, primarily due to a drop in gasoline prices, September’s inflation remained at 2.2 per cent, still within the Bank of Canada’s 1-3 per cent target range.
Despite this moderation in inflation, economists emphasize that price levels remain permanently elevated and are unlikely to return to pre-pandemic levels. This reinforces the need for continued policy adjustments. Recommended from Editorial – Inflation for September eases to 1.6% BoC shows business, consumer sentiment remains low – experts are recommending a faster pace of cuts. Furthermore, the jobs data underscores the potential for continued economic growth, further contributing to the argument for a more accommodative monetary policy. The Bank of Canada is currently operating close to a neutral rate, but with the improved economic outlook and easing inflation, a more aggressive easing policy seems increasingly likely.
