The Bank of Canada (BoC) is ready to accelerate its pace of monetary easing in response to increasing recession concerns. Canadian Imperial Bank of Commerce (CIBC) forecasts that the BoC, led by Governor Tiff Macklem, will cut the policy rate by 50 basis points at each of its meetings in December and January. This would bring the policy rate to an expected 2.25% by June 2025, marking a faster and deeper reduction than anticipated by many economists.
Avery Shenfeld, CIBC’s chief economist, emphasized the urgency of this move in a recent interview, stating, “It really is time to declare victory in the battle against inflation and get the economy moving again.” Shenfeld argued that there is no reason to delay the process of significantly lowering interest rates.
This adjustment in the forecast comes amid growing concerns about the Canadian labor market and economic growth. Recent jobs data revealed that the economy added 22,100 jobs in August, yet the unemployment rate unexpectedly surged to 6.6%. While the increase in joblessness is particularly among young Canadians and newcomers, it is also affecting prime-age workers.
Bank of Canada to Accelerate Monetary Easing to Prevent Recession
Shenfeld noted that Canada’s unemployment rate could climb to 6.8% or even 6.9% in the near future, although this is not his base case scenario. He did not rule out the possibility of a more substantial rate cut at the central bank’s upcoming meeting on October 23.
The BoC has been in the process of reducing its benchmark overnight rate since June, having cut it by 25 basis points in both July and September. The rate now stands at 4.25%, down from a peak of 5% during the previous hiking cycle. Governor Macklem has indicated that further rate cuts could be implemented if inflation and economic conditions warrant them, though he also said the possibility of pausing cuts should growth strengthen or inflation persist.
National Bank of Canada anticipates a 50 basis point cut by year-end, projecting the policy rate to reach 3.5% before ending the easing cycle in 2025 at 2.75%, aligning with the midpoint of the neutral rate where borrowing costs neither stimulate nor restrict growth.
Former BoC Governor Stephen Poloz suggested that the Bank of Canada might need to cut rates below the neutral midpoint if downside risks to the economy intensify. While he did not predict a recession, Poloz advised preparing for the possibility.
CIBC and National Bank’s outlook aligns with Citibank’s Veronica Clark, who was an early advocate for a 50 basis point cut and expects this adjustment at the October meeting. However, other major Canadian banks, including Bank of Montreal, Toronto Dominion Bank, Royal Bank of Canada, and Bank of Nova Scotia, continue to expect more gradual 25 basis-point rate reductions.
Conclusion
Shenfeld argued that current rates are excessively high for economic health and that a more aggressive rate cut could help stimulate Canada’s stagnating housing market. Despite a 2.1% annualized growth rate in the second quarter, driven primarily by government spending and business investment, consumer consumption remains weak, supported mainly by elevated population growth. Early indicators suggest a marked slowdown in growth for the latter half of 2024.
The forecast reflects concerns that Canada’s unemployment rate is higher than the non-accelerating inflation rate of unemployment (NAIRU), a benchmark used to gauge economic balance.
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