Bank of Canada decreases rates in October

Latest bank decision: At its meeting on 23 October, the Bank of Canada reduced its target for the overnight rate to 3.75% from 4.25%, taking total rate cuts this year to 100 basis points.

Monetary policy drivers: The Central Bank's decision was primarily driven by a significant decline in inflation since June to just 1.6% in September, below the 2.0% target. Excess supply in the economy, a soft labor market and moderate economic growth were additional drivers.

Policy outlook: The Bank of Canada has indicated that if the economy evolves as forecasted, it expects to reduce the policy rate further. However, it emphasizes that the timing and pace of future rate reductions will depend on incoming data. The current Consensus among our panelists is for around 100 basis points of extra rate cuts by end-2025, with panelists likely to revise their forecasts to show more aggressive cuts in the coming weeks in light of October’s meeting.

Panelist insight: TD Economics’ James Orlando said: “Rates are still way too high given the state of the economy. To bring rates into better balance, we have another 150 bps in cuts penciled in through 2025. So while the pace of cuts going forward is now highly uncertain, the direction for rates is firmly downwards.” Goldman Sachs analysts had a slightly different view: “We expect that the BoC will return to a 25bp cutting pace at its December meeting given our forecasts for an uptick in sequential inflation in October and an improvement in activity on the back of easier financial conditions, but see the bar for a second 50bp move as low if inflation or growth undershoot expectations. Looking beyond the December meeting, we continue to expect that the BoC will cut consecutively in 25bp increments until reaching a terminal rate of 2.50% in June 2025.”

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