Bank of Canada to cut interest rates deeper, faster over next year, economists say

financialpost.com:

Economists see the Bank of Canada cutting interest rates for a third consecutive meeting next week, continuing what’s anticipated to be a steady downward trend in borrowing costs over the next year as inflation eases.

Policymakers led by governor Tiff Macklem are expected to lower the benchmark overnight rate to 4.25 per cent at their Sept. 4 meeting, according to the median estimate in an August poll conducted by Bloomberg.

Economists are also forecasting faster and deeper cuts to borrowing costs over the next year, and see the central bank reducing the policy rate from the current 4.5 per cent to three per cent by next July. In 2026, the overnight rate is expected to average 2.75 per cent, the data show.

The survey results show analysts’ outlook aligning with market expectations for a gradual return to less restrictive monetary policy — traders in overnight swaps are also betting Macklem will deliver more than 150 basis points of easing by next summer. That would bring the bank’s policy stance closer to the so-called neutral rate — where borrowing costs neither stimulate nor restrict economic growth.

Macklem’s coveted soft landing is also still the base case scenario, economists say, with Canada’s economy expected to grow 1.7 per cent in 2025 as interest rates start easing and export growth ramps up. That matches the United States for the fastest pace of growth in Group of Seven countries. Inflation is forecast to reach the bank’s two per cent target by the end of 2025, from the current 2.5 per cent yearly pace.

The shift in outlook comes amid changing bets for the path for the U.S. Federal Reserve, where chair Jerome Powell is seen joining the global trend in loosening monetary conditions in September. Earlier this