Jumbo Cuts Done and Dusted: Economists Weigh In on the Bank of Canada and Interest Rates

In a significant move for the economy, the Bank of Canada has recently reduced its benchmark lending rate by 50 basis points, bringing the rate down to 3.25 percent. This marks the second consecutive substantial cut aimed at stabilizing the economy in the face of evolving economic conditions.

The central bank's decision places its rate at the upper end of the neutral range, which is intended to neither stimulate nor hinder economic growth. However, the economic landscape is starting to shift as new indicators suggest that inflation may be increasing again. Consumers are showing newfound confidence in their spending, and signs of recovery in the housing market are evident due to more accessible borrowing costs.

The Future of Interest Rates: Insights from Economists

With these developments, economists are offering varying predictions regarding the future of interest rates in Canada.

Expectations from Capital Economics

According to Stephen Brown, a North America economist at Capital Economics, Canadians should not anticipate further significant cuts in interest rates. He notes that the Bank of Canada's new communications approach seems more cautious than expected, indicating a careful evaluation of future decisions. Brown expects three more reductions of 25 basis points each throughout 2025, adjusting earlier projections to reflect an anticipated terminal rate of around 2.5 percent, partly due to renewed consumer spending and fresh inflation pressures.

Desjardins Group's Perspective

Royce Mendes, head of macro strategy at Desjardins Group, acknowledges the recent rate cuts but does not view them as a prelude to a continued aggressive reduction strategy. He believes that after another anticipated 25 basis-point cut in January, the Bank of Canada is likely to pause, allowing time to assess the effects of previous cuts. Desjardins maintains a forecast of a final rate drop to about 2 percent by early 2026, largely due to expected tariffs on Canadian exports to the United States.

David Rosenberg's Viewpoint

In contrast, economist David Rosenberg argues that further cuts are essential for the Canadian economy. He believes the Bank of Canada made the correct decision with the latest reduction and disagrees with the notion that the changes in policy communication indicate a hawkish stance. Rosenberg emphasizes that the overarching message suggests that rates will eventually head lower, with expectations for the rate to settle around 2 percent, possibly even dipping below that level.

Conclusion

As economists continue to analyze the implications of the Bank of Canada's latest decisions, the uncertain economic climate poses challenges and opportunities. The potential rise in inflation and the recovery of consumer behavior will be critical in shaping future monetary policies. The consensus suggests a cautious approach moving forward, taking into account the balance between stimulating growth and managing inflation adequately.

Canada, rates, economy