Markets are coming around to the idea that the Bank of Canada will be forced to start cutting rates by late next year, shifting their bets a day after Governor Tiff Macklem and his officials downgraded the growth outlook.

Overnight swap markets are pricing in nearly two 25-basis-point cuts by December 2024, according to data tracked by Bloomberg, a change that follows policymakers’ rate decision and monetary policy report on Wednesday. The central bank held its overnight rate at 5 per cent while forecasting slow growth and a higher near-term level of inflation. 

“I think it makes sense for markets to be pricing cuts by the end of next year given the evident slowdown in economic growth,” Andrew Kelvin, head of Canadian and global rate strategy for Toronto-Dominion Bank, said by email. “With high rates expected to continue to eat into growth through much of 2024, we do expect there will be enough slack in the economy for the bank to look at rate cuts.”

Global bonds rallied Thursday as the European Central Bank paused its hiking cycle for the first time in more than a year, and measures of underlying inflation cooled a bit more than expected in the U.S. — signs that the “higher for longer” sentiment on rates may have peaked.

Speaking with Canada’s national broadcaster earlier on Thursday, Macklem reiterated that policymakers are likely near the end of hikes. “We may not have to raise interest rates further,” he told the Canadian Broadcasting Corp., depending on whether inflation slows as expected. Markets are still pricing a small chance officials will have to hike in coming meetings.

Statistics Canada reported the country’s payrolls shrunk by 46,800 positions or 0.3 per cent in August, and job vacancies continued to decline, confirming a loosening in the labor market.

Gross domestic product is expected to expand by 0.2 per cent annualized, on average, from the third quarter of 2023 through the first quarter of 2024, according to a Bloomberg survey of economists.