As the Bank of Canada’s rate-cutting cycle is underway, a new economic forecast says the central bank needs to be careful about over-correcting.
TD Economics released its latest economic forecast on Thursday, which noted that inflation is on track to reach the central bank’s two per cent target by the end of the year. Meanwhile, economic growth is coming in slightly higher than a previous forecast from the last quarter, but remains “subdued.”
“Now, the Bank of Canada must be careful on over-correcting with a monetary setting that pushes inflation thru its target on the downside to any great degree. We estimate for Canada that the ‘neutral’ overnight rate is 2.25 per cent, or two full percentage points lower than the current settings,” TD Economics said in the forecast.
“That means it’s highly restrictive and the central bank still has a way to go in cutting interest rates, and that includes the potential for a 50-basis point cut at any meeting.”
As other central banks, like the U.S. Federal Reserve, have also started lowering borrowing costs, TD Economics said the Bank of Canada is “looking pretty good” and is ahead of its peers in its rate-cutting cycle.
“However, even with that, we think there’s still a 200-basis point downhill in front of us,” the forecast said.
Gross domestic product is anticipated to come in at 1.1 per cent during the year, the forecast said.
Consumers are facing difficult circumstances, according to TD Economics, and spending is forecasted to “remain tepid.”
“Real consumer spending advanced at only 0.6 per cent annualized in real terms in the second quarter. The third is not looking much stronger,” the forecast said.
Rate path
Earlier this month, the Bank of Canada cut its key policy rate by 25 basis points to 4.25 per cent. The move marked the third consecutive cut after two previous quarter-percentage-point cuts in June and July. The next rate announcement from the Bank of Canada is scheduled to take place on Oct. 23.
Going forward, the Canadian Imperial Bank of Commerce expects Canada’s central bank to take more aggressive measures to lower borrowing costs, Bloomberg News reported last week. CIBC said it expects the Bank of Canada to bring its policy rate down by 50 basis points in December and January.