Bank of Canada to cut interest rates in September and twice more this year
By Mumal Rathore and Indradip Ghosh
BENGALURU, Aug 29 (Reuters) -The Bank of Canada will cut its overnight rate by 25 basis points for a third straight meeting on Sept. 4 and again in October and December, faster reductions than previously thought, according to a majority of economists canvassed in a Reuters poll.
Inflation fell to a 40-month low of 2.5% in July, heading towards the BoC's target of 2%. Also, labour market data showing signs of persistent weakness suggest more easing is coming.
After keeping the rate at a more than 23-year high of 5.00% for about a year, policymakers reduced it in both June and July by one-quarter point, ahead of the U.S. Federal Reserve, which is expected to start cutting the federal funds rate next month.
At the July monetary policy meeting, Governor Tiff Macklem hinted at shifting the focus of policy to boosting the economy rather than taming inflation.
The BoC will reduce its key rate again by 25 bps to 4.25% on Sept. 4, according to all 28 economists in the Aug. 27-29 Reuters poll.
An around 70% majority of economists, 20 of 28, predicted further reductions in October and December, taking the rate to 3.75%, in line with market pricing. While seven expected the rate to be 4.00% by year-end, only one predicted it to be 3.50%.
That was a shift from a near-90% majority in a July survey expecting the rate to be 4.00% or higher by year-end.
"They (the BoC) are going to cut next week and retain the dovish bias that they've had for the last few months...the Canadian economy is in worse shape than the U.S. and we've got a more interest rate sensitive economy," said Taylor Schleich, rates strategist at National Bank of Canada.
"As a result, they're going to continue to cut after this meeting, in October and December, and probably in the first few meetings of 2025 as well."
Three of five big Canadian banks expect a total of five rate reductions this year.
A lot will depend on the upcoming release of Q2 GDP data due on Aug. 30. The economy likely grew an annualised 1.6% last quarter, according to a separate Reuters poll, lower than the preliminary estimate of 2.2% by Statistics Canada and Q1 growth of 1.7%.
If the poll results are correct, the BoC will deliver 75 bps of rate cuts before the Fed even starts.
The U.S. central bank will reduce interest rates by 25 basis points at each of the remaining three meetings of 2024, according to a separate Reuters poll. Markets are currently pricing over 100 bps of Fed rate cuts this year.
"Canada is a much easier story to tell when it comes to the economic backdrop. Especially starting from this year, we are seeing softening in the economy and persistent deflationary pressure that is stemming from that," said Claire Fan, senior economist at RBC.
"From the BoC's perspective, it's a much clearer picture for them to form a decision rather than the Fed who still to this day has to contend with a lot of uncertainty in their inflation data as well as the labour market data."
Despite expectations of more BoC rate cuts than the Fed, the Canadian dollar has gained about 3.0% in August to hit a five-month high of 1.35 against its U.S. counterpart, reducing risks of a spike in imported inflation.
The central bank is expected to reduce the interest rate by a cumulative 100 basis points next year, according to poll medians, reaching 2.75% by end-2025. That was slightly lower than 3.00% expected last month.
(Other stories from the Reuters global economic poll)
Reporting by Mumal Rathore; Polling by Indradip Ghosh; Editing by Ross Finley and Toby Chopra
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