Morgan Stanley sees 3 more rate cuts from Bank of Canada in 2024

Morgan Stanley anticipates the Bank of Canada will deliver three additional interest rate cuts in 2024, bringing the benchmark rate down to 4% by year-end.

This forecast follows the BoC’s first 25 basis point (bp) cut in the June meeting, lowering the rate to 4.75%.

“Progress on inflation has increased the BoC’s confidence that inflation is moving sustainably to the 2% target,” according to Morgan Stanley. The BoC highlighted encouraging inflation data as a key factor in their decision to initiate rate cuts.

While the bank remains cautious, signaling a “gradual” easing cycle, Governor Macklem did express confidence in further reductions. Analysts interpret this as a sign that “more policy normalization lies ahead than currently priced for 2024/2025.”

This dovish shift by the BoC, compared to their April stance, has implications for currency markets.

“We continue to recommend receiving December 2024 BoC and long positions,” said the bank. “We think Governor Macklem’s shift in tone relative to the April meeting with regards to Fed-BoC divergence supports our view that markets can price in more BoC cuts and that should gain over the coming months.”