With inflation seemingly in check, labour markets cooling and economic growth weakening, CIBC Capital Markets is expecting the Bank of Canada to accelerate its rate cuts.
In a report published Thursday, one of the bank’s economists said that given the downward path for inflation, there’s no reason for central bankers to be timid when it comes to cutting interest rates.
Both Canada and the U.S. are now facing weaker jobs markets “that they don’t really want or need,” the report said, “[s]o cutting rates materially is really a no brainer.”
The report suggests that the central banks will need to speed up the move to easier monetary policy in order to avoid a recession.
It predicts that the Bank of Canada will deliver a pair of 50 basis point rate cuts in December and January, after lowering rates by 25 basis points in October.
“That’s in contrast to a prior forecast that had rates easing at 25 bps at a time, and we no longer expect any pauses on the path to less restrictive rates,” the report said, adding that it now expects the central bank to take rates down to 2.25%, “which is about a half point below the neutral rate.”
Similarly, in the U.S., the report is forecasting a couple of 50 basis point cuts, after an initial 25 basis point cut later this month.
“It too seems likely to try to front load more of the rate cuts than we earlier thought, given a bit more fragility in the labour market,” the report said.
In terms of the outlook for financial assets in this environment, “Bonds still offer value as a portfolio hedge, since if central banks don’t move soon enough to cut rates, the economic damage could not only dent equities, but require a deeper easing in monetary policy to bring the economy back to life,” the report suggested.
As for equities, the report said, “While we likely face some near term jitters on fears of economic weakness, these could fade if central banks deliver some timely medicine. Cyclical stocks could then get a bit of a lift, if not quite what we see coming out of a recession, as risks to global growth diminish with interest rate cuts.”
And, as rates cuts reduce the returns available on GICs and other fixed-income instruments, the report suggested that investor flows could be redirected into dividend-paying equities.