Bank of Canada seen cutting rates deeper, faster over next year

Economists are predicting that the Bank of Canada will continue its trend of cutting interest rates, with a third consecutive reduction expected at the upcoming September 4th meeting. The central bank, led by Governor Tiff Macklem, is anticipated to lower the benchmark overnight rate to 4.25%, marking the beginning of what could be a steady decline in borrowing costs over the next year as inflation eases.

According to a recent Bloomberg poll, economists expect faster and deeper cuts, forecasting that the policy rate will drop to 3% by next July. By 2026, the overnight rate is predicted to average around 2.75%, reflecting a shift towards a less restrictive monetary policy. This outlook aligns with market expectations, where traders are betting on more than 150 basis points of easing by next summer.

Macklem’s goal of achieving a soft landing for Canada’s economy remains the base case, with growth projected at 1.7% in 2025—matching the U.S. as the fastest among the G7 nations. Inflation is expected to reach the Bank’s 2% target by the end of 2025, down from the current 2.5%.

This shift in outlook is partly influenced by similar moves anticipated from the U.S. Federal Reserve, as Chair Jerome Powell is expected to join the global trend of loosening monetary conditions in September. The close economic ties between the U.S. and Canada mean that a slowdown in the U.S. is likely to impact Canada, allowing Macklem to adjust rates without risking the Canadian dollar’s stability.

For Prime Minister Justin Trudeau and his fiscal policymakers, the easing of rates could bring some relief, as it is expected to reduce the yield on 10-year Canadian government bonds, potentially lowering the country’s debt servicing costs.