Bank of Canada and U.S. Fed Expected to Continue Rate Cuts

The Bank of Canada is widely anticipated to deliver a third consecutive interest rate cut on September 4, 2024, as inflationary pressures continue to decline in both Canada and the United States.

Numerous market analysts are projecting that the U.S. Federal Reserve will initiate its own easing cycle later this month. According to Derek Holt, vice-president and head of capital market economics at Scotiabank, both the Bank of Canada and the U.S. Fed are likely to implement quarter-point rate cuts in September.

The U.S. Fed is scheduled to announce its next rate decision on September 18, which follows two weeks after the meeting of the Bank of Canada. Presently, the Canadian central bank has already begun its easing process, having cut rates by 50 basis points.

As inflation continues to ease for Canadians amid moderate economic growth throughout much of 2024, the Bank of Canada has started to lower its benchmark policy rate from high levels since June. However, concerns remain regarding potential inflation resurgence due to a robust U.S. economy.

At the Fed’s monetary policy conference in Jackson Hole, Wyoming, Fed Chair Jerome Powell addressed the ongoing need for a policy adjustment, which should be reassuring for Bank of Canada Governor Tiff Macklem, as both central bank leaders are closely monitoring economic conditions.

While Macklem insists that he and his colleagues are focused solely on Canadian monetary policy, the significant influence of the Canadian-U.S. exchange rate via policy rates could indirectly impact the Bank of Canada’s decisions. A large disparity between these rates may result in a weakened loonie, potentially inflating American import costs for Canadian businesses.

Despite the Governor’s claims of minimal concern regarding currency fluctuations, Holt argues that aggressive rate cuts without synchronized actions from the Fed could significantly weaken the Canadian dollar.

Analyzing the current economic landscape, Holt notes that recent appreciation of the CAD-USD exchange rate is likely tied to increasing expectations that the Fed will also begin rate cuts. The resilient state of the Canadian economy alongside stable oil prices contributes to this optimism.

Experts like Claire Fan from RBC emphasize that uncertainties regarding the future rate path in the U.S. remain high, influenced notably by the upcoming U.S. presidential election. Despite concerns, Fan indicates that the Bank of Canada appears to have sufficient space to maintain net easing without reigniting inflation.

Both Holt and Fan caution against expecting rapid or extensive cuts from the Bank of Canada, predicting continued quarter-point reductions rather than aggressive strategies seen in previous cycles. They assert that the current economic environment does not warrant drastic policy adjustments and suggest a measured and steady approach to rate cuts.