From ‘gradual’ to a cut every meeting: Why are interest rate bets changing?

Expectations for how quickly the Bank of Canada could cut interest rates has been accelerating in recent months. Here's why, and what to expect for the rest of 2024.

The latest inflation data from July sealed bets from economists that the Bank of Canada is set for its third interest rate cut in a row come September, with growing beliefs that there could be even more relief on the horizon.

Statistics Canada said Tuesday that annual inflation slowed to 2.5 per cent last month, the lowest levels seen since March 2021 and another step towards the central bank’s two per cent target.

The Bank of Canada uses its policy rate to broadly set the cost of borrowing across the country, raising the rate to cool the economy and tame inflation or lowering it to spur growth as needed.

Money markets and many economists are now expecting rate cuts of 25 basis points at each of the central bank’s remaining monetary policy decisions in 2024, a call which, if it comes to fruition, would bring the benchmark policy rate from 4.5 per cent to below four per cent by the end of the year.

Forecasts for how quickly the Bank of Canada will unwind its policy rate after the most rapid tightening cycle in its history have accelerated in recent weeks.

Recall that in June, when the central bank delivered its first rate cut in more than four years, governor Tiff Macklem told Canadians to expect a “gradual” pace of easing, that interest rates will not fall as quickly as they went up.

Back then, some forecasts called for an interest rate cut at every other meeting for the remainder of 2024, with the central bank hitting pause to gauge the impact of declining borrowing rates on the economy and Canadian households.

The Bank of Canada has maintained that it’s still taking a meeting-by-meeting approach to interest rates, scrutinizing the available data to say whether it’s clear to cut without reigniting inflation.