Will interest rates be slashed again? Experts are divided
The Canadian economy experienced a standstill in August, according to new Statistics Canada data, raising concerns about the country’s economic health. However, preliminary estimates suggested a rebound is on the horizon for September, leaving economists and policymakers closely watching upcoming data releases.
According to Global News, August saw a significant contraction in goods-producing industries, the sharpest decline since December 2021. Manufacturing and utilities sectors were particularly hard hit, while transportation and warehousing also suffered due to lockouts at major rail companies and the lingering effects of July’s wildfires. These negative impacts were offset by growth in the services sector, with finance, insurance, and public administration showing positive gains.
Despite the August slump, Statistics Canada has projected a 0.3% growth in real GDP for September, offering a glimmer of hope for the Canadian economy. This preliminary estimate will be confirmed when the final figures for the third quarter are released at the end of November.
Mixed signals for the economy
The Bank of Canada, which recently implemented a surprise 50-basis-point interest rate cut, is keeping a close eye on these economic developments. With inflation now at its 2% target, the central bank has shifted its focus to stimulating economic growth. However, the projected annualized growth of 1.0% for the third quarter falls short of the Bank of Canada’s own forecast of 1.5%.
Economists are divided on what this means for the Bank of Canada’s next interest rate decision in December. Some, like CIBC’s Andrew Grantham, believe the weak August figures warrant another aggressive 50-basis-point cut to jumpstart the economy. Others, like BMO’s Doug Porter, caution that it’s too early to make a definitive call, with crucial data on inflation and jobs still pending.
The overall narrative, however, points towards continued weak growth and the need for further economic stimulus. RBC economist Claire Fan emphasized that the current trend supports the view that inflation is more likely to fall than rise, reinforcing their call for another significant rate cut in December.
“Soft GDP growth is reinforcing that inflation is more likely to drift (broadly) lower rather than higher,” she wrote.
Money markets seem to agree, with bets on a 50-basis-point cut increasing following the release of the GDP data. The coming weeks will be crucial in determining the Bank of Canada’s next move as it strives to balance inflation control with economic growth.
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