Accelerated Rate Cuts by December 2024?

As concerns about a looming recession grow, one of Canada’s largest lenders, CIBC, predicts that the Bank of Canada will accelerate its monetary easing strategy to protect the economy. According to CIBC's latest forecast, policymakers may potentially cut the policy rate by 50 basis points at both the December and January meetings. By next June, the central bank could end its easing cycle, bringing the policy rate down to 2.25%.

This aggressive forecast suggests faster and deeper cuts than what many economists anticipated. CIBC's Chief Economist, Avery Shenfeld, believes it’s time to shift focus away from inflation and concentrate on stimulating the economy, as concerns have been growing about Canada’s weakening labor market and overall economic slowdown.

"There’s no reason not to speed up the process of getting interest rates down materially.”

Avery Shenfeld, CIBC Chief Economist

Recent employment data has added urgency to this outlook. Unemployment rate jumped to 6.6%, whre jo losses hav now extended from young Canadians and newcomers to prime-age workers now as well. Shenfeld warns that unemployment could rise up to 6.9% in the coming months. With economic growth slowing and joblessness increasing, some experts even suggest a "jumbo" rate cut could occur as soon as the Bank of Canada’s next meeting in October.

The Bank of Canada has already been in easing mode since June, cutting the benchmark rate by 25 basis points in both July and September, lowering the rate to 4.25% from a high of 5%. Governor Macklem hinted last week that if the economy continues to slow, cuts of 50 basis points or more may be on the table, though he also noted that pauses or smaller cuts could occur if growth or inflation remains robust.

While other major Canadian banks, such as National Bank of Canada and Citibank, share CIBC’s outlook for a 50 basis-point cut before the end of the year, most of the country’s largest banks—including BMO, RBC and TD Bank—expect a more cautious approach with 25 basis-point cuts.

Shenfeld stresses that current interest rates may be too high for Canada’s economic health and that front-loading rate reductions could be beneficial, especially as the housing market stagnates. Canada’s economy grew at an annualized rate of 2.1% in the second quarter, but that growth was largely driven by government spending and business investment. Consumer spending, propped up by strong population growth, remains weak, and economic output is expected to slow in the latter half of 2024.

A major factor driving this anticipated policy shift is the rising unemployment rate, which, according to Shenfeld, is higher than the economy’s natural level of unemployment, also known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU). Although some economists argue that NAIRU is hard to estimate, the evidence of economic imbalance continues to mount.

As policymakers consider these shifting economic dynamics, the consensus is clear: Canada’s economy is at a critical juncture. Whether the Bank of Canada accelerates its easing strategy or takes a more measured approach, the next few months will be crucial for the country’s economic future. 

Source: BNN Bloomberg