The US Fed has already introduced one oversized cut
Canada’s economy is slowing faster than expected – which may prompt the Bank of Canada to consider bigger-than-usual rate cuts as a response, according to a new analysis by Royal Bank of Canada (RBC) economist Claire Fan.
Third-quarter GDP growth for 2024 is projected to be just 1%, below the BoC's forecast of 2.8%. Fan said she expected a continuous slowdown heading into 2025, which may push the BoC towards more significant rate reductions. Partiaularly concerning, according to Fan, is the fact that there’s “little evidence” the economy is close to turning a corner.
“Hiring demand continued to cool through the summer with job openings plunging below where it was before the pandemic,” she noted. “Moving into 2025, a significant slowing in immigration and population growth remains a key headwind.”
The economist expects the BoC to lower interest rates by 50 basis points in October and December, substantial reductions compared to the US Federal Reserve's predicted 25-basis-point cuts. These projected cuts would come as Canada's inflation falls closer to the BoC's 1-3% target range, with inflation pressures expected to ease further in 2025.
The BoC has already cut rates three times in 2024, with Governor Tiff Macklem emphasizing the need for faster growth to stabilize the economy.
In the long run, Fan expects the BoC to continue cutting rates by 25 basis points per meeting until the overnight rate reaches 2%, down from an earlier projection of 3%. These aim to stimulate the economy and stabilize labour markets. However, challenges remain, specifically in business investment and global economic volatility.
