Markets overwhelmingly expect the Bank of Canada to deliver its third consecutive quarter-point rate cut when it meets this week.

That would bring the Bank’s overnight target rate down to 4.25%, a full 75 basis points (or 0.75%) below its peak of 5.00%.

Encouraging inflation data and signs of a slowing economy have given the central bank the green light to move forward with its steady pace of monetary policy easing, which some say should continue for the Bank’s subsequent meetings in October and December.

If these rate cuts are implemented, it would bring the cumulative easing for the year to 125 basis points and bring the overnight target rate back to 3.75%, a level last seen in November of 2022.

“OIS markets have the policy rate falling to 3% by next summer,” noted Scotiabank economist Derek Holt. “In short, the Canadian rates curve is significantly priced for perfection in the delivery of aggressive rate cuts. What could add to this pricing would be bigger and sooner cuts compared to the 25bps per meeting pace that is roughly priced.”

The latest Big bank rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from our previous table in parentheses.

	Current Target Rate:	Target Rate: Q4 ’24	Target Rate: Q4 ’25	5-Year Bond Yield: Q4 ’24	5-Year Bond Yield: Q4 ‘25
	4.50%	3.75%	3.00%	2.95%	2.90%
	4.50%	3.75% (-25bps)	2.50%	NA	NA
	4.50%	4.00%	3.00%	3.15%	3.00%
	4.50%	4.00%	3.00%	3.00%	3.00%
	4.50%	4.00%	3.25%	3.45%	3.50%
	4.50%	3.75%	2.50%	2.90% (-5 bps)	2.60% (-5bps)

What the experts are saying…

Here’s a look at what some economists are saying ahead of Wednesday’s Bank of Canada rate decision.

On risks to the current rate-cut forecast:

• Scotiabank: “Risks to this straight-line trajectory include the course of data and market developments, possibly the contents of the Federal government’s Fall fiscal update some time in November or December that may include election year goodies, plus US election aftermath. To paraphrase former Governor Poloz when he skipped between two cuts in early 2015, policy adjustments do not have to go in a straight-line and there is merit to keeping some powder dry.” (Source)

On GDP performance:

• CIBC: “The surprisingly weak start to Q3 will raise concerns at the Bank of Canada that slack in the economy is continuing to open up and that the unemployment rate could continue moving higher as a result.” (Source)

On inflation:

• TD Economics: “On inflation, we have been arguing that the fundamentals of inflation were calling for interest rate cuts since the beginning of 2024. Our initial preference was for the easing cycle to commence in April, so in some respects, Canada is in catch-up mode.” (Source)
• RBC Economics: “CPI prints, although still important to the BoC’s consideration, are backward-looking and lag the economic backdrop that has continued to soften. The 2.1% annualized increase in Q2 GDP was above the 1.5% gain that the BoC expected in the July MPR but still left per-capita output down for the seventh in the last eight quarters.” (Source)
• Desjardins: “The danger now is that the Bank of Canada falls behind the curve if policymakers remain too focused on the slightly above-target inflation. Following previous tightening cycles, central banks have often responded too late to signs of economic deterioration.” (Source)

On the potential for “up-sized” rate cuts:

• Scotiabank: “Up-sizing cuts could send a negative signalling effect by way of saying to Canadians and markets that the BoC sees something it’s really worried about in order to merit picking up the pace. Up-sizing is an option the BoC should preserve for potentially more exigent circumstances.” (Source)

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Last modified: September 3, 2024