By Promit Mukherjee

OTTAWA (Reuters) – The Bank of Canada's annual economic growth forecast is viewed as overly optimistic by economists, who believe another significant interest rate cut will likely be needed to stimulate growth this year.

Despite expectations that the BoC would lower its annual gross domestic product (GDP) forecast during the quarterly monetary policy report released on Wednesday, the bank only adjusted its third-quarter growth projection and left its 2024 estimate unchanged, surprising many analysts.

Tony Stillo, director of Canadian economics at Oxford Economics, noted, "The bank had a more positive view on the economy for this year." He anticipates that annual GDP will fall short of the bank's estimate, necessitating a 50 basis points rate cut in December to boost the economy.

In the monetary policy report, the bank revised its annualized third-quarter GDP estimate to 1.5% from July's 2.8%, while keeping its full-year estimate steady at 1.2% and not altering its 2025 forecast.

Avery Shenfeld, Managing Director and Chief Economist for Capital Markets at CIBC, commented, "If growth comes in a shade below the Bank of Canada's forecast, it could be one factor that supports a 50 basis-point cut in December."

This potential larger cut would align the key policy rate closer to the BoC's neutral rate of interest, which economists indicate is the ideal level for maintaining balanced growth.

Economist Claire Fan from RBC also projected a 50-bps rate cut this December, emphasizing that real GDP growth may remain subdued as interest rates likely stay restrictive until 2025.

On Wednesday, the bank reduced its key benchmark rate to 3.75%. Governor Tiff Macklem mentioned the need for stronger growth given that inflation appears under control. The timing of future rate reductions will depend on data collected between now and December 11, the date for the next rate decision, which will include GDP figures for August and September, October inflation data, and two employment reports.