We expect the Bank of Canada’s final policy decision of 2024 on Wednesday to be another 50 basis point interest rate cut—adding to a 50 bps cut in October and 125 bps in total cuts since June.
Canada’s economic backdrop has yet to crumble in a way that would cause the BoC to panic, but it is also clear that interest rates are higher than they need to be for inflation to hold at the central bank’s 2% target. Some interest rate-sensitive sectors of the economy (home resales, consumer spending on durables) showed signs of life in Q3, but overall gross domestic product growth is tracking below the BoC’s October forecast in the second half of the year and per person GDP declined for a sixth consecutive quarter in Q3.
The unemployment rate—up by a full percentage point from a year ago—is flagging excess supply in labour markets and, excluding the impact of mortgage interest costs, (which are rising as a direct result of earlier interest rate increases) consumer price index growth has been essentially at or below the BoC’s 2% inflation target for all of 2024. It was 1.4% year-over-year in October.
And interest rates are still high— particularly when compared to that softening economic backdrop. The 50 bps cut we expect on Wednesday would still leave the overnight rate at the top end of the 2.25% to 3.25% range that the central bank views as “neutral,” well above the 1.75% peak in the decade ahead of the pandemic. In other words, additional interest rate cuts so far have been the equivalent of the BoC easing off the economy’s brakes rather than stepping on the gas. We continue to expect that additional interest rate cuts will be needed in the year ahead with the overnight rate ultimately falling below the BoC’s estimate of the neutral range at 2% in mid-2025.
Week ahead data watch
We expect U.S. headline inflation to tick up slightly from 2.6% year-over-year in October to 2.7%. Energy prices likely continued to decline on an annual basis but at a slower rate, pushing headline inflation higher. Food price growth was likely to edge lower again. Excluding volatile components (food and energy), we look for core inflation to hold steady at 3.3% for the third consecutive month.
Statistics Canada’s advance wholesale indicators suggest core wholesale sales likely rose by 0.5% in October, largely driven by higher motor vehicles, parts and accessories sales.
We look for manufacturing sales to grow by 1.3% in October, in line with StatsCan’s preliminary estimate. The growth was mainly supported by petroleum, coal products and transportation equipment subsectors.
