The Bank of Canada will be able to achieve a soft landing for the country’s economy without resorting to large interest rate cuts, analysts say. The central bank is expected to lower borrowing costs gradually, with economists surveyed by Bloomberg projecting a benchmark overnight rate falling from 4.25 per cent to 3 per cent by April 2025.
Gradual Rate Cuts to Support Economic Growth
The median estimates of economists surveyed by Bloomberg suggest that the Bank of Canada will keep lowering interest rates at quarter percentage-point increments over the next five decisions. This approach is expected to support economic growth, which is projected to average a two per cent annualized clip in the last three quarters of 2025. The survey projectseconomic growthwill be driven by a sustained expansion in household spending and business investment.
Economists Confident in Central Bank’s Policy
The results of the survey suggest that economists are confident in the central bank’s policy to prevent an economic downturn after one of the most aggressive hiking cycles in its history. They also signal confidence that the bank’s tightening campaign has successfully tamedinflation, with the survey projecting price gains will sustainably reach the two per cent inflation target starting in the second quarter of 2025.
Signs of Economic Weakness
Despite the positive outlook, Canada’s economy is increasingly showing signs of weakness. Consumption growth has slowed, despitepopulation growththat’s among the fastest in the world. Thejobless ratehit 6.6 per cent in August, up 1.6 percentage points since the start of 2023, with youth and newcomer unemployment ratesmuch higher.
Economists Boost Forecasts for Peak Unemployment
In the survey, economists also boosted their forecasts for peak unemployment in the country, which is now expected to hit 6.8 per cent at the end of this year and the beginning of the next.
Markets Less Sanguine About Outlook
Market participants are less optimistic about the outlook, with traders in overnight swaps putting the odds of a 50 basis-point cut at the central bank’s next meeting at just over a coin flip. They’re also betting on the policy rate falling to 2.5 per cent by the end of 2025, a quarter point lower than the 2.75 per cent expected by economists.
StatsCan Data Show Economic Growth Tracking Below Forecasts
On Friday, Statistics Canada released data showing economic growth tracking around one per cent in the third quarter of 2024, below the forecasts of economists and the bank. Policymakers have said they wanted the economy to grow faster to prevent an undershoot of the inflation target.
Macklem’s Comments on Interest Rates
Earlier this week, Governor Macklem said he wantedgrowth to pick up above two per cent. He also emphasized the need for a soft landing, saying "we need to stick the landing" as inflation falls to 2 per cent.
What Does This Mean for Interest Rates?
The outlook for interest rates is uncertain, with markets and economists having different views on the path of monetary policy. While some expect a large rate cut, others believe that the central bank will continue to gradually lower interest rates to support economic growth.
Key Points:
- Economists surveyed by Bloomberg project a benchmark overnight rate falling from 4.25 per cent to 3 per cent by April 2025.
- The median estimates of economists suggest that the Bank of Canada will keep lowering interest rates at quarter percentage-point increments over the next five decisions.
- Economic growth is projected to average a two per cent annualized clip in the last three quarters of 2025.
- The survey projects economic growth driven by sustained expansion in household spending and business investment.
- Economists are confident in the central bank’s policy to prevent an economic downturn after one of the most aggressive hiking cycles in its history.
- Canada’s economy is showing signs of weakness, with consumption growth slowing despite population growth among the fastest in the world.
Sources:
- Bloomberg.com
- StatsCan data
