Expectations are set for the Bank of Canada (BoC) to reduce its Overnight rate by 50 basis points (bps) during this week's policy meeting, potentially bringing it down to 3.25%.
This anticipated move follows a dovish statement from the central bank in October, highlighting concerns over a soft labour market, disinflation, and declining inflation expectations.
Since that time, data have seemingly supported the case for further aggressive monetary easing, Macquarie economists wrote in a note.
Looking ahead, the forecast extends to the first half of 2025, where an additional cut totaling 100 bps is anticipated, which would lower the Overnight rate further to 2.25%.
This prospective easing trajectory stands in stark contrast to that of the United States, where the federal funds rate is expected to decrease to only 4.13%.
The BoC's actions would thus represent a significant policy departure from the U.S. Federal Reserve's stance.
This divergence in monetary policy between Canada and the United States is projected to reach a spread of 175 to 200 bps.
If this scenario materializes, it would constitute the largest gap in interest rates between the two countries since the late 1990s. The potential discrepancy underscores differing economic conditions and policy responses in the neighboring nations.
The BoC's potential rate cut this week is part of a broader trend of adjustments to monetary policy amid shifting economic indicators. Central banks globally are navigating the delicate balance of fostering economic growth while managing inflationary pressures.
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