Morgan Stanley expects the Bank of Canada to cut interest rates three more times in 2024, bringing the benchmark rate down to 4% by the end of the year.
This forecast was made after the Bank of Canada cut rates by 25 basis points (bp) at its June meeting, bringing the rate down to 4.75%.
According to Morgan Stanley, progress on inflation has increased the Bank of Canada's confidence in sustainably returning inflation to its 2% target. The Bank of Canada views encouraging inflation data as a key factor in initiating rate cuts.
Although the Bank of Canada remains cautious, stating it will "gradually" ease policy, Governor Macklem expressed confidence in further rate cuts. Analysts believe this indicates the "possibility of more policy normalization in 2024/2025."
Compared to its stance in April, this dovish shift by the Bank of Canada has an impact on the currency market.
"We continue to recommend holding long AUD/CAD positions into December 2024," Morgan Stanley stated, "We believe that Governor Macklem's tone shift supports our view that the market can expect more rate cuts from the Bank of Canada, and USD/CAD should rise in the coming months."
