The economy is stuck in a period of below-potential GDP growth, with previous interest rate hikes weighing on consumer spending and investment. This will keep downward pressure on core inflation, which we expect will reach the Bank of Canada’s 2% target by the middle of next year. As the Bank has said that it is prepared to cut interest rates more aggressively if GDP growth fails to pick up, we expect the Bank to cut by a larger 50bp at each of its next two meetings, before reverting to 25bp cuts in 2025 until the policy rate reaches 2.25% by mid-year. Lower interest rates should, in turn, drive a recovery in GDP growth from just 1.1% this year to 2.0% in 2025 and 3.0% in 2026.
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