07:48 AM EDT, 09/12/2024 (MT Newswires) -- The economic backdrop in Canada has softened, inflation has been cooperating, and the Bank of Canada has outlined clear concerns about excess supply in the economy that could push inflation below 2% in the future, noted RBC.

Given the softening backdrop, the bank now expects the BoC to continue cutting at an every-meeting pace -- eliminating RBC's previous expectation for a pause. That faster cadence of cuts means Canada's central bank now hits terminal -- 3.00% -- in April rather than July.

The bank predicts the BoC will deliver consistent 25bp cuts throughout the remainder of the cycle, with a "sizable2 risk of a 50bps reduction. The July Monetary Policy Report had a "shockingly" high Q3 gross domestic product forecast of 2.8% annualized, while RBC estimates a number closer to just 1.0%.

The September policy meeting had stable messaging with no surprises after the dovish shift in July. Markets are pricing about 30bps of easing at each of the October and December meetings.

Canada-United States spreads were trending lower for the first half of the year before tilting the other way in July -- Government of Canada bonds underperforming. Despite the additional cut added to RBC's US forecast, the bank continues to forecast the BoC will out-cut the Fed and GoCs will again outperform.

The curve has steepened significantly with 2s10s, or -60bps end of June, sitting at -10bps currently. RBC sees curves to remain around current levels for the rest of the year before gradual steepening in 2025.