With easing inflation, the Bank of Canada is likely to cut interest rates again this Wednesday.

As inflation concerns gradually subside,National formal futures platform the Bank of Canada is likely to implement its third consecutive rate cut on Wednesday in an attempt to achieve a soft landing for the economy. Market participants and economists generally expect the Bank of Canada policymakers, led by Governor Tiff Macklem, to lower the benchmark overnight rate to 4.25%. However, with the Federal Reserve also preparing to take action, the key question is whether the central bank officials will discuss the long-term economic outlook amid market predictions of a series of rate cuts over the next year.

According to a survey of economists, the Bank of Canada is expected to cut rates by a quarter percentage point at each of the next five meetings, bringing the policy rate down to 3% by mid-2025. This would place the rate within what the central bank refers to as the "neutral range," which neither stimulates nor restrains economic activity.

Claire Fan, an economist at RBC, noted, "The economic performance is weak, and they need to act now to lower rates. There's no reason to keep rates at their current high levels."

In June, Macklem became the first central bank governor among the G7 nations to adopt an easing monetary policy, with the Bank of Canada following up with another rate cut in July. However, he has emphasized that rate adjustments are not pre-determined but rather depend on the new economic data available at each meeting.

Nevertheless, officials have indicated that further rate cuts are "reasonable" if inflation continues to decline. Canada's inflation rate has remained within the central bank's target range of 1% to 3% for seven consecutive months, reaching 2.5% in July. At the same time, core inflation measures are also falling, and the rate of price increases has slowed.

The Bank of Canada has begun to focus more on the risks of economic downside. In the minutes of the July meeting, officials mentioned that they spent a considerable amount of time discussing the weak labor market.

Since July, the likelihood of the Federal Reserve cutting rates has also increased, which could relieve Macklem from leading the rate cuts ahead of Canada's largest trading partner, as this could result in the depreciation of the Canadian dollar.

Overnight swap traders in the market have fully priced in a 25 basis points rate cut this Wednesday, while the possibility of a 50 basis points cut is considered less than 10%. A larger rate cut may trigger market panic and imply that the Bank of Canada views economic issues as more severe than anticipated. Fan believes, "This could cause greater market panic than what we currently have, especially in such a tense market environment."

Some economists believe that the Bank of Canada might cautiously open the door to a more significant rate cut. While it is unlikely Macklem will declare victory over inflation, he may place more emphasis on the weak labor market and reduce concerns about price pressures.

"I think communication can become more dovish," said Royce Mendes, managing director of macro strategy at Desjardins Securities. "For the Bank of Canada, inflation seems to be a secondary issue now, and the focus should be on employment."

Currently, Canada's unemployment rate is rising while inflation is falling. Consumers are feeling the pressure of rising borrowing costs, and per capita household consumption is declining at a rate close to that seen during economic recessions. Although record immigration numbers are supporting overall economic growth, the pressure of mortgage renewals is also increasing.

However, economists do not foresee large-scale layoffs. According to the median forecast in the economist survey, although the unemployment rate has risen from 5% at the beginning of last year to 6.4%, it is expected that the unemployment rate will not significantly exceed a peak of 6.7% by the end of 2024.

Although Canada's economy grew at an annual rate of 2.1% in the second quarter, primarily driven by government spending, early indications suggest that economic growth may slow down in the third quarter.

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