The BoC Came Through With A Rate Cut. Economists Are Already Anticipating Another

The Bank of Canada (BoC) lowered its policy interest rate on Wednesday, bringing it down to 4.5% — a level it hasn't been at since the early days of June 2023. This latest move from the central bank marks the second cut of a cycle that began back in March 2022, and saw rates raised sharply on 10 occasions.

As these things tend to go, all eyes are now on the next BoC rate announcement, which is scheduled for September 4, 2024. After that, there will be two more announcements left in the year: one on October 23 and another on December 11.

Although it’s too early to say anything with absolute certainty, Canadian economists seem optimistic that the Bank will deliver on a third cut in the near-term.

BMO’s Douglas Porter, for one, wrote in a note on Wednesday that “the door is still open for additional cuts, and September is very much on the table if the next core [Consumer Price Index] print behaves.” As for what a cut-favourable CPI might be, Porter pointed to a print that’s, at most, 0.2% above its month-ago level.

Porter also drew attention to the “tone” of Governing Council’s messaging when they addressed reporters at yesterday’s press conference, saying that it was “more dovish” than expected, making mention of “excess supply in the economy” and “slack in the labour market.” Macklem also spoke to the “symmetric nature” of their inflation targeting in his remarks to the press, explaining that that means they are just as concerned about ending up below-target inflation as above.

“The tone of today's many remarks almost seems to suggest that the Bank now needs to be convinced not to keep trimming rates,” Porter said. “We continue to look for two more rate cuts before the end of 2024, taking the overnight rate down to 4%, with the precise timing over the next three meetings driven by the incoming data — with CPI on centre stage, but the unemployment rate now dancing close to the limelight as well.”

Over at Scotiabank, the belief is similar: there are “further cuts coming,” and sooner rather than later. Economist Derek Holt wrote in a publication that they are are holding onto to their forecast that the Bank will opt to cut in both September and October.

Although Holt also commented on the “dovish” tone of the Governing Council’s communications on Wednesday, he also cautioned that it was not “uncontestably” so and that “there is more upside risk to inflation” than the Bank has let on.

“What the BoC is counting upon is that the supply side of the economy can grow at a rate relative to actual GDP growth in a way that creates ongoing excess capacity that is disinflationary. Macklem says because of this, they need to focus more upon getting actual GDP growth higher,” Holt explained. “Their assumption is that potential GDP growth is faster than actual GDP growth because of population growth ‘which means excess supply has increased.’ More excess supply means more disinflationary pressure if they’re right.”

However, as far as productivity goes, not all population growth can be treated equally, Holt warned. “The nonpermanent category of immigration does not contribute equally to potential output and hence the BoC is overestimating growth on the supply side.”

Risks to the BoC's narrative aside, taking stock of economists with other big banks reveals that sentiments are, overarchingly, in favour of cuts to come. Desjardins is also calling for cuts in September and October, followed by a pause in December. While RBC hasn't called for a September cut specifically, their economists have said they are anticipating “two additional rate cuts this year… that will lower the overnight rate to a still restrictive 4% by the end of 2024.”