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CANADA: RBC See Further Cuts Needed With Rates At 2% In Mid-2025

CANADA
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  • RBC expect the BoC to cut another 50bps on Wednesday.
  • “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.”
  • A 50bp cut on Wed “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.”
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  • RBC expect the BoC to cut another 50bps on Wednesday.
  • “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.”
  • A 50bp cut on Wed “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.”