Is Canada Heading for More Rate Cuts Amid Economic Cooldown?

In the midst of a slowing economy, Canada is being drawn into conversations about potential rate cuts. The Bank of Canada’s recent first-quarter Market Participants Survey has stirred expectations of two more cuts in the near future. As the market anticipates these adjustments, a closer look at the underlying economic sentiments is in order. According to Canadian Mortgage Trends, the expectation is for the BoC’s policy rate to drop from its current standing of 2.75% to a hopeful 2.25% by the close of 2025.

Market Alignment and Divergence

The market’s voices, including RBC, CIBC, and TD, sing in harmony, aligning with the forecasted cuts to a 2.25% policy rate by year-end. However, BMO and National Bank cast their sights on a slightly deeper dive to 2.00%, projecting a more brisk easing trajectory. Scotiabank, on a divergent path, now sees a trio of cuts spread over the course of 2026, hinging on international trade tensions and a dip in global demand.

A Shift in Forecasting

For Scotiabank, recent forecast revisions suggest a more reactive approach to North American economic conditions. Jean-Francois Perrault, a voice of Scotia, placates the idea of maintaining current rates if international trading scenarios do not escalate unexpectedly. Yet, he hints that further depreciation in the U.S. economy could spearhead rate reductions sooner than anticipated.

Survey Insights: Challenges and Changes

Beyond the anticipated rate modifications, the latest survey sheds light on an increasingly cautious mood regarding Canada’s growth prospects. There looms a 40% probability of Canada entering a recession within the next 12 months. Amid these concerns, inflation projections suggest a gentle decrease from the present 2.30% to a nuanced 2.00% by the end of 2026.

Expression of Caution in Growth and Bond Yields

The forecast for Canada’s real GDP paints a modest picture with an outlook set at 1.0% for 2025 and slightly warming to 1.7% in the subsequent year. This sentiment of tempered growth is echoed by the bond yield forecasts, expected to linger consistently within the 2.50% to 3.00% range through 2025.

Reflecting on the Road Ahead

With these projections, a clear tone of caution is resonating through Canada’s economic corridors. Almost half of the respondents reckon that risks lean towards lower interest rates, yet only 23% believe in an economy operating at full GDP potential.

The unfolding economic developments in Canada will surely hold the attention of investors, policymakers, and citizens alike, as they collectively hold their breath to see what the future beholds.