The Bank of Canada is widely expected to follow up its June interest-rate cut with another on Wednesday, and embark on a series of reductions to address moribund consumption and a rapidly weakening labor market.
All 14 economists surveyed last week by The Wall Street Journal predicted Canada’s central bank would cut its benchmark rate by a quarter point, to 4.5%. The majority of analysts surveyed expect the policy rate to end 2024 at 4%, and move lower still next year to 3%.
Expectations leading up to Wednesday’s rate decision oscillated over the past month, especially after inflation data for May showed a surprise reacceleration. Eventually, traders swung swiftly toward a rate cut in recent weeks after inflation in June cooled, job growth stalled and the unemployment rate rose, and businesses and households painted a rather downbeat portrait of the Canadian economy in quarterly surveys conducted by the Bank of Canada.
The central bank’s surveys showed that “high interest rates and elevated price levels are dampening aggregate demand through many channels,” said Dominique Lapointe, head of macro strategy at Manulife Investment Management.
When the Bank of Canada cut its policy rate in June, Gov. Tiff Macklem said it was reasonable to expect more rate decreases so long as inflation continued to slow, though he cautioned the pace of reductions would be gradual. The latest inflation report said consumer prices declined in June from the previous month, and slowed to 2.7% on a 12-month basis from 2.9% in May—or the sixth straight month that headline inflation has been within the Bank of Canada’s target range of 1% and 3%. The central bank sets rates to achieve and maintain 2% inflation.
“Inflation was sufficiently tame in June after the pop in May, while the broader economic backdrop remains soft. The latter suggests there’s more disinflationary pressure coming,” said Benjamin Reitzes, an economist at BMO Capital Markets.
The central bank’s second-quarter business-outlook survey indicated companies hold a moribund assessment of sales growth over the next year. The polling also pointed to a sharper-than-expected weakening in the labor market. The share of firms citing labor shortages as a hurdle to growth fell to its lowest level since 2009.
The companies surveyed also said they “no longer see a need for higher wages to attract or hire workers”—pointing to a moderation in wage pressures. Some Bank of Canada officials had cited wage growth as a potential upward risk to inflation.This comes amid a rising unemployment rate, which reached 6.4% in June, or a 29-month high, as growth in the labor force, fueled by immigration, outpaces job creation by a wide margin. Economists at National Bank Financial expect the unemployment rate to climb to 7% later this year, pushing the Bank of Canada to cut its main rate by 1.75 percentage points over the next 12 months.
Despite these warning signs, only four of the 14 economists surveyed predicted rate cuts at every Bank of Canada fixed-date announcement scheduled for the remainder of 2024. After Wednesday, the central bank issues policy decisions in early September, late October and mid-December.
Carl Gomez, an economist at CoStar Group’s Canadian unit, said the policy rate is likely to end 2024 at 3.75%, “although I believe more [cuts] are warranted” due to broad-based economic weakness. Royce Mendes, an economist at Desjardins Securities, said the central bank, after cutting on Wednesday, could signal a pause in September so officials can “take some extra time to assess how lower interest rates are filtering through the economy.” He expects the policy rate to end 2024 at 4%.