The Bank of Canada will cut overnight interest rates on Wednesday by 25 basis points to 4.50% amid expectations that inflation will continue to decline, according to a large majority of economists polled by Reuters.
With the economy slowing and unemployment rising, the central bank is expected to cut interest rates twice more in 2024, although only a handful of economists predict the key rate will reach 4.00% by the end of the year, with risks leaning more towards a cut rate less than more.
While analysts have consistently predicted at least three Bank of Canada interest rate cuts in 2024 since the start of the year, the possibility of a fourth cut in borrowing costs is now at a critical level, in part because the U.S. Federal Reserve have not started reducing interest rates.
While Canadian inflation has fallen further into the BoC's 1%-3% target range amid a weak labor market and an unaggressive corporate outlook, steady core inflation and wage growth may warrant caution.
However, nearly three-quarters of economists interviewed in the July 16-19 survey, or 22 out of 30, expect the BoC to cut the policy rate further to 4.50% on July 24. This is consistent with the interest rate futures market.
Canada's central bank cut borrowing costs last month, marking the first rate cut in four years.
The BoC is expected to pause in its easing cycle at its September meeting before resuming rate cuts in October and December. This suggests that the BoC will cut rates twice before the Fed begins its easing cycle, which is now expected to take place in September.
Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, said second-quarter CPI inflation "was below what the Bank (of Canada) forecast in April and the business outlook is very dovish. At the same time factors are in place for the BoC cut rates further at next week's meeting.”
