Canada Inflation Cooling: Economists Predict Bank of Canada Rate Cuts
Inflation concerns are receding as fresh economic data reveal a significant cooling in Canada’s consumer price index (CPI). July’s CPI figures showed a deceleration to 2.5 percent, marking the slowest pace of inflation since March 2021. This development is fueling expectations among economists that the Bank of Canada will initiate a series of rate cuts throughout the remainder of the year, and potentially into 2025.
The prevailing sentiment amongst financial experts points to a markedly reduced risk of persistent inflation, leading to increased confidence about the central bank’s ability to adjust monetary policy. Several prominent economists have voiced their predictions, with RBC’s Claire Fan stating that the latest reading provides the Bank of Canada with a clear directive to shift its focus towards a weakening economic backdrop. Fan highlighted the consistent downward trend in core inflation measures, noting the “normalization” of inflationary pressures and a return to pre-pandemic norms dating back to 2019. She confidently predicted a 25-basis point reduction at the Bank’s next meeting in September.
Capital Economics’ Olivia Cross echoed this sentiment, emphasizing that core inflation may surprisingly undershoot the Bank’s forecasts, creating an opportunity for a steeper policy cut. Cross noted that the three-month annualized rate remains at 2.7 percent, and if this downward momentum continues, the central bank could take a more aggressive approach. Toronto-Dominion Bank’s James Orlando believes that inflation risks are fading, shifting the Bank’s attention to the overall health of the economy and consumer spending. He anticipates another 25-basis point cut within the next two weeks, reflecting the central bank’s willingness to respond to a softening consumer landscape and a concerning deterioration in the labor market.
Bank of Montreal’s Benjamin Reitzes agreed, anticipating a 25-basis point reduction in September, fueled by encouraging core inflation figures – the trim and median CPIs both down one-to-two ticks to 2.7 percent and 2.4 percent, respectively. This slowdown, dating back to April 2021, reinforces the belief that the Bank of Canada will continue to cut rates as inflation steadily approaches the two-percent target and a significant output gap emerges in the economy. Furthermore, Reitzes predicts that rate cuts will persist throughout the year, driven by ongoing trends.
RSM Canada’s Tu Nguyen has also highlighted the data, solidifying an expectation of a 25-basis point cut in September and continued reductions into 2025. Nguyen emphasized a significant slowdown in shelter inflation, a previously stubborn component of the CPI, noting that recent rate cuts are effectively dampening this price pressure. The consensus is growing that the Bank of Canada, now with inflation trending downwards, will enact further cuts, targeting a return to the two-percent mark and building upon economic recovery. This consistent performance over the next few years suggests the central bank’s approach will remain reactive to economic conditions, utilizing rate adjustments to maintain stability and foster sustainable economic growth. Ongoing support for this outlook comes from RBC, TD Bank, and BMO, all of which project multiple rate cuts this year and into the coming years.
