BoC Expected to Cut Rates by 50 Basis Points in December, Followed by Four Consecutive 25 Basis Point Reductions: Macquarie

Macquarie economists expect the Bank of Canada (BoC) to cut interest rates by 50 basis points (bp) in December, followed by four additional 25 bp reductions. This forecast appears to align with the recent economic trends highlighted in Canada's employment data.

In November, employment in Canada increased significantly with 51,000 jobs added, largely due to major public sector hiring. However, the unemployment rate rose to 6.8%. This increase resulted from a sharp rise in the labor force participation rate, recovering from a decrease observed in September and October. Notably, a 0.2% decline in hours worked raises concerns as a potential factor that could negatively impact real GDP growth forecasts for the fourth quarter.

Due to changes in immigration policy, the population growth is currently estimated at around 80,000, and this slowdown is expected to continue. This adjustment may signal a potential for a sustained decline in the future.

The gap between the current employment growth trend and the equilibrium level necessary to maintain the employment rate indicates a potentially widening output gap. The forecasts detailed in Macquarie economists' Global Economic and Market Outlook report published earlier this week suggest that these economic indicators will steer the BoC toward a series of interest rate cuts.

The anticipated reductions aim to lower the overnight rate to 2.25% by June 2025, starting with a 50 bp cut in December, followed by four consecutive 25 bp reductions at each subsequent meeting.