Canadian rate cuts tied to Fed's decisions

Vanguard economist predicts cautious approach by BoC

Canadian rate cuts tied to Fed's decisions

The Bank of Canada is expected to proceed cautiously with rate cuts, waiting for the U.S. Federal Reserve to signal readiness to reduce borrowing costs, according to Vanguard Group chief economist Roger Aliaga-Diaz.

Aliaga-Diaz pointed out that the Federal Reserve's recent forecasts suggest only one interest rate cut in 2024. While the Bank of Canada has already started lowering rates—becoming the first among the G7 central banks to do so this month—it may be hesitant to move too far ahead of the Fed.

Speaking to BNN Bloomberg, Aliaga-Diaz noted: “Cuts every other meeting are more reasonable” for Canada. He added that Governor Tiff Macklem and his governing council might require assurance of a forthcoming rate cut from the Fed, even if it is scheduled for a later date.

Canada’s status as a key commodity exporter makes it sensitive to currency swings, which could influence the central bank's decisions. The Canadian dollar has depreciated by 3.7% against the U.S. dollar this year due to slower economic growth and easing inflation.

Aliaga-Diaz suggested that a pattern of rate cuts every other meeting could lower the Bank of Canada’s policy interest rate to 4.25% by the end of the year, from its current 4.75%.

In contrast, Citigroup’s Veronica Clark predicts more aggressive action, forecasting cuts at each of the four remaining meetings in 2024, which would reduce the policy rate to 3.75% as the labor market softens.

Aliaga-Diaz anticipated that inflation will continue to move towards the central bank’s 2% target, offering a favorable environment for fixed-income investors. The yield on the 10-year Canada benchmark bond closed last week at 3.282%.

“It’s a good time to be in bonds. We say bonds are back,” Aliaga-Diaz said.