If inflation continues to show signs of weakness in the United States, the Bank of Canada could cut its key rate five times by mid-2025. (Photo: courtesy)
PODCAST. U.S. inflation data for May was lower than expected and according to Fiera Capital Chairman and Global CEO Jean-Guy Desjardins, this opens the door to an easing of monetary policy in the part of the American Federal Reserve.
“Markets were pricing in anywhere from zero to a quarter percentage point rate cut by the end of the year before the figures released on June 12. But with the figures for May, that opens the door to two drops of a quarter of a point between now and the end of the year in the United States,” explains Jean-Guy Desjardins.
According to him, this is likely to reinforce the Bank of Canada in its strategy of normalizing its monetary policy towards the objective of a neutral key rate of 3% to 3.25%. “It will be able to move forward without risking the repercussions of a rate cut independently of the American Federal Reserve, with the effect that it could have on the value of the Canadian dollar in relation to the American currency,” says -he.
On June 5, the Bank of Canada reduced its key rate by a quarter of a point to bring it to 4.75%, while that of the American Federal Reserve remains stable for the moment between 5.25% and 5.5 %.
Jean-Guy Desjardins specifies that the Bank of Canada, the Bank of England, the European Central Bank and even the Central Bank of China are at the start of a period of lowering rates, while the strength of the American economy does not did not allow the Federal Reserve to join the movement. This could change if the trend started in May continues.
“The cycle of rate cuts could stretch until the end of 2025 or even the beginning of 2026. A systematic period of rate cuts lasting 18 to 22 months which would be very positive for consumer confidence and businesses, just as for real estate and the stock market. This could lead to an economic cycle of sustained growth for the next three to five years,” he says.
In Canada, he adds that markets are forecasting two to three other rate cuts of 25 basis points, to which would be added two additional cuts of the same magnitude during the first six months of 2025.
For investors who would like to build a portfolio of fixed income securities, Jean-Guy Desjardins maintains that American bonds are currently much more attractive than those of Canada.
