Intelligent Investment
Sticking the Landing
Canada Monthly Market Commentary
September 30, 2024 2 Minute Read
The Federal Reserve, the largest central bank in the world, has now joined the global shift towards lower interest rates with a ‘jumbo’-sized cut of 50 bps this month to bring its policy rate to 4.75%-5.00%. The Federal Reserve cited a ‘greater confidence’ in being able to sustainably reach its inflation target while also balancing the risks to employment. After starting its rate cut cycle a little later than its peers, the Federal Reserve looks like it might want to move quickly over the coming months. Its internal projections call for another 50 bps of cuts by the end of the year, 100 bps of decreases throughout 2025 and a final 50 bps drop in 2026. Cumulatively, this means the U.S. economy can expect 200 bps of cuts before the policy interest rate stabilizes at 2.75%-3.00%.
The Bank of Canada is expected to follow a very similar path forward as it looks to ‘stick the landing’ with the Canadian economy. The central bank maintained its pace of interest rate cuts with another 25 bps decrease earlier this month to bring the policy rate to 4.25%. However, there is growing speculation that the Bank of Canada may need to accelerate its monetary policy easing with faster and deeper cuts than currently expected. Headline inflation has fallen to target levels and slowed to 2.0% in August, potentially a couple quarters ahead of the Bank of Canada’s July projection that called for inflation to settle sustainably at 2% in H2 2025. Economic indicators also continue to signal a slowing Canadian economy, especially on a per capita basis, with weaker productivity, business investment, consumer spending and hiring activity. With current interest rates still well within what the Bank of Canada deems as restrictive territory, the central bank will be facing increased pressure to quickly lower interest rates back to more accommodative levels.
As it stands currently, the median interest rate forecast from the major Canadian banks calls for an additional 50 bps of decreases by the end of the year, up to 125 bps of cuts in 2025 before a final 25 bps decline for the policy interest rate to settle at 2.25% by mid-2026.
Economic Highlights:
- Headline inflation slowed to 2.0% in August 2024 while core measures of CPI-median and CPI-trim also fell to 2.3% and 2.4%, respectively.
- Employment increased by 22,100 jobs in August 2024 while the unemployment rate rose to its highest level since 2017 to 6.6%.
- Real GDP growth for Q2 2024 was 2.1% annualized, however, growth was flat at the end of the quarter and expected to persist into July according to advanced GDP estimates.
Viewpoints:
- Fed unveils oversized rate cut as it gains 'greater confidence' about inflation
- Tiff Macklem signals more rate cuts are coming, but remains tightlipped on size and pace
- Inflation in Canada Hits 2% Target for First Time Since 2021
- Bank of Canada putting more weight on downside inflation and growth risks, meeting summary shows
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