The Bank of Canada is expected to implement more rapid rate cuts

Economists see the Bank of Canada cutting interest rates for a third consecutive meeting next week, continuing what’s anticipated to be a steady downward trend in borrowing costs over the next year as inflation eases.

A faster and deeper cuts is coming

Policymakers, led by Governor Tiff Macklem, are anticipated to reduce the benchmark overnight rate to 4.25% during their meeting on September 4, based on the median forecast from an August Bloomberg poll.

Looking ahead, economists predict more significant and rapid reductions in borrowing costs over the coming year. They expect the central bank to lower the policy rate from its current level of 4.5% to 3% by July of next year. By 2026, the overnight rate is projected to average around 2.75%.

The survey results indicate that analysts' projections are in line with market expectations for a gradual shift towards a less restrictive monetary policy. Traders in overnight swaps are betting that Macklem will implement over 150 basis points of easing by next summer, moving the bank's policy closer to the so-called neutral rate—a point at which borrowing costs neither stimulate nor hinder economic growth.

Macklem’s coveted soft landing is also still the base case scenario, economists say, with Canada’s economy expected to grow 1.7 per cent in 2025 as interest rates start easing and export growth ramps up. That matches the United States for the fastest pace of growth in Group of Seven countries. Inflation is forecast to reach the bank’s two per cent target by the end of 2025, from the current 2.5 per cent yearly pace.

US and Canada’s economies are deeply intertwined

Canada and the United States share a distinctive and robust relationship shaped by their shared geography, aligned values, common interests, and deep economic connections. This partnership extends to a strong and enduring defense and national security alliance, which enhances the security of both nations beyond what could be achieved individually. Trade and investment between the two countries support millions of jobs and ensure the seamless flow of goods and people across their border, which is crucial for their economic competitiveness and prosperity.

The economies of the two countries are closely linked, so a slowdown in the U.S. is likely to impact Canada as well. As the Federal Reserve is expected to cut rates, Macklem can proceed with normalizing borrowing costs in Canada without the concern of deviating too far from U.S. policy. This alignment helps prevent any adverse effects on the Canadian dollar, resulting in a more synchronized policy stance between the two countries.

The evolving global interest rate environment also brings some relief for Prime Minister Justin Trudeau and Canada's fiscal policymakers, who are contending with challenging poll numbers and high debt servicing costs. Yields on 10-year Canadian government bonds—crucial for the federal government’s interest expenses—are projected to average around 3% over the next year, down from over 3.25% in the July survey.

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