The Bank of Canada reduced its overnight rate to 4.25 per cent amid cooling inflation and soft growth.
The central bank’s dovish statement went so far as to indicate that more rate cuts are coming as inflation continues to decline toward the 2 per cent goal next year. Now, with unemployment rising in a slow job market, the central bank has acknowledged that growth has become a priority.
Read more of RSM Canada’s insights on the economy and the middle market.
We expect one more 25 basis-point rate cut this year, ending the year at 4 per cent. In addition, we expect rate cuts to continue next year until the terminal rate is reached, which we estimate to be between 3 per cent and 3.5 per cent.
Slow and steady remain the way forward as the Bank of Canada aims to encourage growth without reigniting inflation.
More disinflation is expected as households renew their mortgages at higher rates and cut discretionary spending. Even shelter and services, which have been the most stubborn inflation components, are easing.
The downside risk to growth has grown as high interest rates restrict consumer spending and business investments. In the last quarter, the economy expanded primarily thanks to government spending.
In addition, new restrictions on temporary residents—both international students and temporary workers—will put a lid on aggregate consumer spending.
Over the past year, consumer spending per capita has declined as households have tightened their purse strings, and aggregate spending has grown only because of population growth through immigration.
The unemployment rate has been rising because of a lack of hiring rather than widespread layoffs, which can be seen through the particularly high unemployment rates among younger workers and newcomers to Canada—those entering the labour market and looking for jobs for the first time.
Rates need to come down for businesses to start hiring again and for these groups to find work.
Now, with fewer immigrants coming in, the slack in the economy will become more apparent. More rate cuts are needed to revive the economy and boost spending per capita.
