07:45 AM EDT, 08/02/2024 (MT Newswires) -- The market-implied path currently sees the Bank of Canada's (BoC) policy rate falling to 3.25% by the middle of next year, in line with the long-held forecast of Desjardins that the central bank would need to significantly cut rates ahead of the mortgage renewal wall.

The move has come faster than Desjardins had predicted, with two-year yields reaching the bank's Q3 target two months early. That said, Desjardins still believes there's more room to run and the next few months will be "critical" to seeing financial markets fully incorporate the bank's forecast for the BoC to cut rates below its neutral rate estimate.

Now that policymakers seemingly agree with the view of Desjardins that the battle against inflation has largely been won, Canadian central bankers are no longer preoccupied with driving price pressures lower. The BoC dropped any and all references to the suite of inflation indicators previously cited as guiding rate decisions.

Instead, officials are now focused on balancing two opposing forces: weakness in the economy and the lingering inflation in specific sectors such as shelter and other services. Also absent was any guidance about rate cuts being gradual, which opens the door for consistent moves at upcoming fixed announcement dates, stated Desjardins.

Given the amount of economic slack already evident, central bankers will likely need to take rates below neutral. This comes as no surprise to anyone who's followed the coverage on mortgage renewals, added the bank.

No silver bullet can erase upcoming mortgage payment shocks, but rate cuts can work to make the situation more manageable for most households. As a result, Desjardins believes the decline in rates and steepening of the yield curve has further to go.