The latest July inflation data has led economists to believe that the Bank of Canada will cut interest rates for the third consecutive time in September, and more and more people think that there may be further room for rate cuts in the future.
Statistics Canada said on Tuesday (August 20) that the annual inflation rate fell to 2.5% last month, the lowest level since March 2021, moving closer to the Bank of Canada's 2% target.
The Bank of Canada sets the national borrowing cost by adjusting the policy interest rate, raising rates to cool the economy and curb inflation, or lowering rates to stimulate economic growth.
The money market and many economists now expect the Bank of Canada to cut interest rates by 25 basis points at each remaining monetary policy meeting in 2024. If this expectation becomes reality, it will lower the benchmark policy rate from 4.5% to below 4% by the end of the year.
The forecast for the Bank of Canada to quickly lower its policy rate after experiencing the fastest tightening cycle in history has accelerated in recent weeks. Looking back to June, when the Bank of Canada cut interest rates for the first time in over four years, Governor Tiff Macklem had stated that the rate cuts would be 'gradual,' meaning the rates would not drop as quickly as they had risen.
At that time, some forecasts suggested that interest rates would be cut at every other meeting in the remaining time of 2024, and the Bank of Canada would pause to assess the impact of the borrowing rate reduction on the economy and Canadian households.
The Bank of Canada continues to believe that it will make rate decisions in a meeting-by-meeting manner, carefully examining data to determine whether it can cut rates without reigniting inflation.
"We expect the direction of policy interest rates to be downward, but we have not set a fixed path," said Bank of Canada Governor Macklem after the Bank of Canada's latest meeting in July.
However, James Orlando, Chief Economist at TD Bank, believes that there have been significant changes in the background of the interest rate path since June.
At that time, the Bank of Canada cautiously began an easing cycle, fearing that if policies were relaxed too early, inflation relief might stagnate and may not fully return to the target level of 2%.
Orlando pointed out that the concerns about accelerating inflation in the United States are particularly serious, while the economies of both the United States and Canada show a smaller need for tightening interest rate environment. "Now, both of these factors are starting to change," said Orlando.
The Bank of Canada's latest communication shows increasing concerns about inflation falling too low, which is also a challenge for the Bank of Canada to achieve price stability.
Orlando explained that inflation performance in Canada and the United States is becoming more "moderate," and it is expected that the Federal Reserve may begin its own easing cycle in September.
Earlier this month, weak job reports in the United States also raised concerns in global markets about the Federal Reserve delaying interest rate cuts for too long and the possibility of an impending economic recession. This also comes against the backdrop of cracks in the Canadian labor market.
With the economy shedding jobs over the past two months, Canada's unemployment rate rose to 6.4% this summer. This contrasts with previous labor market reports, which typically showed that despite the rise in the unemployment rate, employers were still hiring.
The Bank of Canada's decision-making committee expressed concerns about further deterioration in the labor market when considering recent interest rate cuts. If the 'idle' phenomenon in the labor market continues to exist, it may delay the rebound in growth and consumption.
Overall, the Bank of Canada is now less concerned about inflation not reaching 2% and more concerned about the possibility of the economy suffering larger impacts than expected.
'So you will see there may be a significant room for interest rate cuts,' Orlando said.
TD Bank estimates that the Bank of Canada has a lot of room to lower interest rates without affecting inflation progress. Orlando said he expected the central bank to continue cutting interest rates at 'almost every meeting' until the end of next year, reaching 2% or 2.5%.
Experts interviewed by Global News do not believe that the Bank of Canada will take excessive steps in the interest rate reduction path, and it is expected to maintain a 25 basis point rate cut.
Orlando said that the cracks in the Canadian economy are not deep enough to support a rate cut of more than 25 basis points.
Tu Nguyen, economist at RSM Canada, said that the Bank of Canada is not yet ready to declare victory on inflation, which would prevent it from making a 50 basis point or larger rate cut.
She told Global News that wage growth remains stubborn and being eager to cut interest rates could trigger new inflationary factors, such as a booming real estate market caused by lower borrowing costs.
Nguyen predicts that the Bank of Canada will reduce the policy interest rate to 4% by the end of 2024 and conduct a series of interest rate cuts in 2025.