by Staff Writers, AdvisorAnalyst.com
In a decisive move, the Bank of Canada (BoC) has accelerated its pace of interest rate cuts, reducing the overnight rate by 50 basis points. This decision comes in response to mounting evidence that both the economy and labor markets are weakening more than necessary to achieve the central bank's 2% inflation target. As economist Claire Fan from the Royal Bank of Canada notes, "The reduction won’t be the last one," indicating that further rate cuts are anticipated to support stronger GDP growth.
Economic Implications and Forecast Adjustments
The BoC's recent action suggests a shift towards a more accommodative monetary policy stance. The overnight rate, now at 3.75%, remains restrictive. However, the central bank has hinted at additional cuts to foster economic recovery. According to Claire Fan, "We continue to expect one more 50-bps rate cut from the BoC this December," which would align the overnight rate with the upper end of the BoC’s neutral range estimate of 3.25%.
Fan's analysis suggests that Canada's real GDP growth is likely to remain subdued longer than anticipated by the BoC, with projections of only 1.3% growth in 2025—significantly below the central bank's forecast of 2.1%. This outlook reflects persistent economic challenges, as interest rates remain restrictive until at least 2025.
Moreover, labor market conditions are expected to deteriorate further, with unemployment potentially rising to 7% in upcoming quarters. Such developments could intensify disinflationary pressures into 2025. Fan projects that the BoC will lower interest rates to 2% by July next year, a level that is slightly below the central bank’s estimated neutral range.
Meeting Recap and Future Outlook
The BoC's decision was largely anticipated by markets, given recent data from the Q3 Business Outlook Survey and September’s inflation figures, both indicating reduced inflation expectations in Canada. Governor Tiff Macklem emphasized during his press conference that "we are back to low inflation" in Canada, underscoring balanced risks on inflation rather than focusing solely on economic weaknesses.
Despite concerns about shelter and wage growth, which remain key inflationary pressures, these are expected to moderate. The most significant risk highlighted by Fan is a slower-than-expected economic recovery. With a deeply negative output gap and restrictive monetary policy, demand recovery and absorption of excess supply may take longer.
As Fan aptly points out, "Rate cuts will boost the economy with a lag." Even as interest rates decline, many borrowers might still face increasing debt payments in the future. This scenario underscores the urgency for the BoC to "front-load" its easing measures to mitigate potential economic slowdowns.
While the BoC's aggressive rate cuts aim to stabilize and stimulate economic growth, challenges remain. The path forward requires careful navigation to balance inflation risks with economic recovery efforts.
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