Intelligent Investment

Interest Rate Cuts Expected for 2024

Canada Monthly Market Commentary

December 20, 2023 2 Minute Read

The Bank of Canada and the Federal Reserve remained on pause and held their policy interest rates flat at 5.00% and 5.25-5.50%, respectively, for the year-end. Given signs of slowing economies and cooling inflation, the central banks have cautiously shifted their focus now towards determining how long interest rates need to remain elevated, instead of how much higher they might need to go.

The pivot was welcomed as financial markets responded favourably to the expectation for lower interest rates next year with strong rallies in both bond and stock markets. As a result, the Canada 10-year bond yield has continued to fall. At current levels, the Canada 10-year is about 10 bps lower than where it started in 2023, masking an otherwise incredibly volatile year for debt markets.

For next year, the Bank of Canada believes the economy may no longer be in excess demand, but inflation remains the main prerequisite for any potential movement in interest rates. The central bank has stated it would need to see multiple consecutive months of downward momentum in core inflation before it can even start considering interest rate cuts. With Canada’s November headline inflation rate holding flat at 3.1% and stubbornly above the Bank of Canada’s target rate of 2.0%, it highlights the delicate path forward to meeting the central bank’s requirements.

Despite the cautious sentiment shared by the central banks, market expectations have solidified around interest rate cuts in 2024. The Federal Reserve is projecting three cuts next year, bringing interest rates to 4.50-4.75% by the end of 2024. For Canada, market-implied and economist forecasts currently call for as many as five cuts next year starting in early Q2 2024, with year-end interest rates of 3.75%.

Economic Highlights:

  • Employment grew by 25,000 jobs in November 2023 and the unemployment rate rose slightly to 5.8%.
  • Headline inflation held flat in November 2023 at 3.1% with core inflation metrics also unchanged.
  • Population growth surged to its fastest quarterly pace on record in Q3 2023, led by increases in non-permanent residents.



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