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 AUD/CAD 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 USD/CAD should gain over the coming months."