The Bank of Canada needs to announce rate cuts during its June 5 meeting to spur economic growth. Any further delay and the bank would risk making a policy error and undermining Canada’s growth outlook.
A 25-basis-point rate cut would kickstart the easing cycle, which will unfold gradually over the next year and a half, and mark the start of a return to a post-pandemic economy. This would be the bank’s first rate change in nearly a year, since July 2023, and the first rate cut since March 2020 when the pandemic began.
We expect a total of four rate cuts for the remainder of 2024, bringing the policy rate to 4% by the end of the year. Delaying rate cuts to July will accomplish little on the inflation front because a rate of 4.75% would still be more than sufficiently restrictive. But it will stifle consumer spending and business investments.
Headline and core inflation numbers have all fallen to within the Bank of Canada’s 1 to 3% target range. Headline inflation has been below 3% for four consecutive months, which meets the criteria of sustained evidence of disinflation. In fact, aside from mortgage interest rates or shelter, inflation is squarely at or below 2% and below pre-pandemic levels.
There has been little growth for nearly a year. Canada has been saved from a recession by immigration, which adds to labour supply and consumer demand but only enough to barely keep the economy afloat. The unemployment rate has been steadily climbing. And while April posted a surprisingly strong job report, the long-term trend of softening labour demand is undeniable.
Given the divergence in growth and inflation between Canada and the United States, the Bank of Canada should cut rates before the Federal Reserve. The rate gap between two central banks will cause the loonie to weaken, but the effect will be short-lived, as the Fed themselves is expected to slash rates in September. The temporary weakening of the loonie will be a worthwhile tradeoff to kickoff recovery.
