Analysts are predicting that the overnight rate will fall to 2.25% by June of next year. Does this mean another rate cut on Dec 11, 2024?

The Bank of Canada is scheduled to announce its next overnight rate decision on December 11, 2024. Recent economic indicators suggest a potential rate cut, though the magnitude remains uncertain.

In October 2024, the Bank of Canada reduced the overnight rate by 50 basis points to 3.75%, citing a softening labor market and inflation aligning with the 2% target. 

Dec 11, 2024 Update

Economists are divided on the upcoming decision. According to an analysis in Investment Executive, This is how the large banks predict next week:

• CIBC anticipates a 50-basis point cut, pointing to increased economic slack and a weak labor market.
• BMO expects a more cautious 25-basis point reduction, noting the need for more economic data before a definitive stance.
• TD Economics also forecasts a 25-basis point cut, highlighting persistent wage pressures and resilience in household financial metrics.

Additionally, market predictions indicate a 93% probability of a 25-basis point cut, bringing the rate to 3.5%. Given these insights, it’s likely the Bank of Canada will lower the overnight rate on December 11, with the specific reduction—25 or 50 basis points—still under consideration.

What does 2025 have in store?

CIBC has provided an outlook suggesting a more aggressive easing of the Bank of Canada’s monetary policy in the coming months. The bank forecasts that the overnight rate will drop to 2.75% by March 2025 and further decline to 2.25% by June 2025. This outlook reflects their assessment of ongoing economic conditions, which include:

Key Drivers Behind CIBC’s Prediction

1. Weakening Labor Market:
   • CIBC highlights the ongoing softening in employment metrics, with rising unemployment and slowing job creation. These trends suggest reduced consumer spending power and lower economic growth, necessitating looser monetary policy.
2. Subdued Inflation:
   • With inflation aligning with the Bank of Canada’s 2% target and continuing to show signs of stabilization, CIBC believes the central bank has room to ease interest rates without reigniting inflationary pressures.
3. Household Debt and Mortgage Stress:
   • High levels of household debt and the impact of elevated mortgage rates on consumer budgets are pushing the Bank of Canada to consider rate cuts to alleviate financial strain.
4. Global Economic Pressures:
   • Slower growth in key trading partners, including the United States and Europe, has created additional headwinds for Canada’s export-driven economy. This supports the case for more accommodative monetary policy to foster domestic resilience.

Implications of the Forecast

If CIBC’s projections hold true, the Bank of Canada would shift from a cautiously easing stance to a more aggressive approach, marking a significant departure from its recent monetary tightening phase. The proposed cuts to 2.75% in March and 2.25% in June could result in:

• Increased Borrowing and Spending: Lower interest rates would encourage businesses and households to borrow and invest, potentially boosting economic activity.
• Support for Housing Markets: Lower rates may provide relief to homeowners with variable-rate mortgages, stimulate the housing market, create favourable conditions for the 1.6 mortgage renewals due in 2025.
• Downside Risks: There remains the potential for inflation to reignite if rate cuts are too aggressive or if global supply chain disruptions reemerge.

CIBC’s forecast underscores their belief that the Canadian economy requires significant support to navigate current challenges, making deeper rate cuts a likely response from the Bank of Canada.