**A Deeper Look at a September Bank of Canada Rate Cut: What Markets Expect and What Comes Next**
*Based on original reporting by Aditya Siddhartha for InvestingLive.com*
As August progresses, attention is increasingly turning toward the Bank of Canada’s (BoC) next move on interest rates. Markets have already priced in a high probability of a rate cut at the central bank’s September meeting. According to recent data, market participants assign a 90% likelihood to a 25 basis point (bps) rate reduction during that meeting. But what happens beyond September? Analysts, traders, and economists are actively debating the direction and pace of monetary policy decisions by the BoC over the remainder of 2024 and into early 2025.
Let’s dive into the underlying data, policy drivers, and broader context shaping the BoC’s actions and the implications for the Canadian Dollar (CAD), inflation, consumer demand, and the foreign exchange (Forex) landscape.
## Market Expectations: Rate Cut in September Almost Fully Priced In
As of mid-August 2024, swaps markets are signaling a 90% chance that the Bank of Canada will cut its benchmark interest rate in September by 25 bps. This would bring the overnight rate from 4.50% to 4.25%.
Key factors influencing this expectation include:
– **Slower inflation readings**: Year-over-year inflation has been steadily moderating after peaking in 2022 amid post-pandemic disruptions and elevated commodity prices.
– **Weaker consumer spending**: High interest rates over the past two years have cooled borrowing and spending, contributing to a deceleration in overall economic activity.
– **Labor market softening**: Employment growth in Canada has begun to taper, with job vacancies decreasing and wage growth stabilizing. This makes it easier for the BoC to pivot toward more accommodative monetary policy.
The BoC kicked off its easing cycle in June 2024 with a widely anticipated 25 bps rate cut. Following that move, policymakers held rates unchanged in July, signaling a cautious, data-dependent approach. The September meeting will be pivotal in confirming the central bank’s readiness to continue its easing path.
## The Reasons Behind Easing Expectations
Several macroeconomic indicators and global dynamics are driving expectations of more rate cuts from the BoC:
### 1. **Inflation Cooling**
Canada’s Consumer Price Index (CPI) has moderated considerably from its 2022 highs. The most recent figures show:
– **Headline CPI**: Down to 2.5% year-over-year as of July 2024.
– **Core inflation measures**, such as CPI-trim and CPI-median, are also hovering close to the BoC’s 2% target.
With inflation now within the central bank’s comfort zone, the need to maintain elevated interest rates has decreased. The BoC’s mandate is to keep inflation near 2%, and current data supports a gradual unwind of the aggressive hiking cycle seen in 2022 and 2023.
### 2. **Weakening Economy**
Recent GDP data indicates that Canadian economic growth is slowing:
– Q2 2024 GDP grew at an annualized rate of just 1.1%, down from 2.3% in Q1.
– Consumer spending growth remains sluggish as households grapple with higher debt servicing costs.
– Real estate activity has cooled, contributing to lower ancillary spending on home-related goods and services.
This economic environment strengthens the argument for greater monetary accommodation to support growth.
### 3. **Labor Market Showing Signs of Slack**
While the job market remains relatively resilient, it is no longer overheating.
– The unemployment rate has crept up to 5.8% as of July 2024, up from a low of 5.0% in late 2023.
– Job creation is slowing, particularly in sectors such as construction, retail, and manufacturing.
– Wage growth is stabilizing around
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