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The financial market believes the Bank of Canada will cut its policy rate to 2.75 per cent by June 2025, before holding it there for the remainder of 2025 and into 2026, according to a survey released by the central bank on Monday.
The quarterly survey was conducted Sept. 18-27 and is based on responses from 30 financial market participants. Since then, the central bank has made a 50-basis point cut to its overnight rate, bringing it down to 3.75 per cent.
The Bank of Canada has indicated the range for its neutral rate is between 2.25 per cent and 3.25 per cent, but has not provided a specific target. The median of 26 responses in the survey has the long-term nominal neutral rate at 2.75 per cent.
The neutral rate represents a theoretical level of borrowing costs that neither encourage nor discourage economic growth.
Last week, Bank of Canada governor Tiff Macklem at a conference in Toronto said the central bank might have to “discover” the neutral rate.
“We don’t know exactly the pace. We don’t exactly know where the landing is,” he said.
The survey also took market participants’ pulse on inflation and the Canadian economy.
The median of 27 responses has the consumer price index at 2.2 per cent by year-end and two per cent for 2025 and that the Canadian economy will grow by 1.5 per cent in 2024 and 1.9 per cent in 2025. The Bank of Canada’s latest forecast has 1.2 per cent annual growth this year and 2.1 per cent growth in 2025.
In terms of the likelihood of a recession, just 20 per cent believe a recession will occur in the next six months. Respondents had geopolitical risk as a major downside to growth and a stronger housing market as a major upside risk.
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