Proactive Investors - The Bank of Canada (BoC) is likely to cut interest rates in December by 25 basis points after headline inflation for October came in at 2%, analysts at the Bank of America Corp (NYSE:BAC) believe.
Analysts see just a 25 basis point cut in December instead of another 50 basis point decrease as inflation rose month-over-month from 1.6% in September, driven by higher gas prices.
Core inflation increased to 2.6% from 2.4%.
A weak economy and lower interest rates appear to be helping service inflation which has been sticky, analysts noted.
It came in at 3.6% for the 12 months ending in October, its smallest increase since January 2022, compared to 4% in September.
“We expect a 25 basis point cut on December 11 as the BoC moves to a less restrictive stance now that inflation is at the target and to support a weak economy,” Bank of America’s analysts wrote in a note to clients.
They see another 50 basis point cut as unlikely because they are yet to observe the effects of the large-sized cut in October and the BoC has already done 125 basis points in cuts this year.
“The BoC seemed concerned by the downward risks to inflation stemming from weak activity when it cut the policy rate by 50 basis points in October,” they wrote.
Bank of America now expects inflation at 2.1% year-over-year by the end of 2024, up from their earlier forecast of 1.8%. They continue to expect it at 2% by the end of 2025.
“In 2025, we expect the BoC to continue cutting all the way to 3%, but with upside risks to our terminal rate as the economy accelerates and given that our US team now expects stronger US growth and a higher Fed terminal rate (4%),” they wrote.