BofA Global Research on Wednesday forecast that the Bank of Canada (BoC) will cut its overnight interest rate target by 25 basis points to 4.25% on September 4, relying on continued economic weakness, rising unemployment, and a consistent downward trend in inflation.
This expected move is in line with the pattern of weakening economic indicators, with the rate expected to reach 3.75% by the end of this year and 3.0% by the end of 2025.
Canada's economy is showing signs of weakness, as evidenced by modest monthly GDP growth of 0.2% in May and a preliminary estimate of 0.1% in June. Retail sales in June decreased by 0.3%, although core retail sales increased by 0.4%. However, preliminary figures suggested a recovery in July with an increase of 0.6%.
BofA Global Research expects second-quarter GDP growth of 2.0% at a seasonally adjusted annual rate, which is close to the trend reading but still points to a sluggish overall economy.
The labor market also did not perform well, with employment figures falling for the second month in a row in July and wage growth slowing. The unemployment rate remains high at 6.4%.
Although full-time employment rose in July, this was offset by a decline in part-time employment, which points to a potential change in employment trends but still supports the case for a rate cut in September.
Inflation continued to decline, with headline inflation in July falling to 2.5% year-on-year from 2.7%, and core inflation, which includes the median and trimmed measure, falling to 2.6% from 2.8%. Services inflation, which is mainly affected by the cost of living, also showed a significant decline. This trend in inflation supports the BoC's stance, as Governor Tiff Macklem previously indicated that lower inflation may lead to more rate cuts.
Commentary from BofA Global Research indicates that while the decline in BoC final rate expectations has contributed to the outperformance of Canadian rates throughout the year, this rate of performance is likely to slow if economic data in the US continues to be normal.
In the foreign exchange market, the Canadian dollar is no longer seen as undervalued against the US dollar, and the upcoming BoC decision is not expected to have a significant impact on the currency pair.
