08:22 AM EDT, 08/30/2024 (MT Newswires) -- The Bank of Canada (BoC) initiated the current easing cycle at the June 5 meeting on the basis that "recent data has increased our confidence that inflation will continue to move towards the 2% target," noted ING.

This was followed up by a second cut on July 24, justified by data showing "broad price pressures continuing to ease" with "ongoing excess supply lowering inflationary pressures."

Since that meeting business survey responses have cooled further, employment has fallen for the second month in a row and inflation has slowed to 2.5% at the headline level, comfortably within the BoC's 1%-3% target range. Since unemployment has risen 1.6 percentage points since the July 2022 low, this underscores the BoC's point that the economy is now experiencing excess supply, wrote the bank in a note.

This excess supply will continue to depress inflation while the effect of previous interest rate increases will continue to impact demand, stated ING. In Canada, mortgages are fixed for a much shorter period of time than in the United States and this means households face higher borrowing costs when their mortgage rate resets higher.

In fact, debt service costs as a proportion of household income are at 30+ year highs, which will contribute to sluggish consumer spending with the economy as a whole expected to grow only 0.9% this year.

The bank is forecasting inflation to average 2% next year, so given these economic conditions ING sees scope for meaningful interest rate cuts.

The bank agrees with financial market pricing of another 25bps rate cut next Wednesday and targets a 3% overnight rate for Q2 2025.