Bank of Canada would be ājustifiedā cutting rates by half a point. Hereās why ā National
After proceeding at a tentative, 25-basis-point cut pace in the first three interest rate cuts of its cycle, many economists expect the Bank of Canada will take an oversized step lower in its upcoming decision on Wednesday.
The central bankās policy rate stands at 4.25 per cent following the most recent quarter-point cut in early September.
But a lotās changed in Canadaās economy since that time.
For one, inflationās looking to be well-tamed, dropping from a bullās eye on the Bank of Canadaās two per cent target to 1.6 per cent in the latest reading.
Tiff Macklem, governor of the central bank, has made clear in recent speeches that the Bank of Canada is equally concerned about inflation dropping too low below two per cent as it is about price pressures holding too high.
While Macklem had previously warned there could be ābumpsā on the path back to the price stability target, inflation has come under control faster than the central bank first anticipated. Previous forecasts called for a return to two per cent inflation sometime in 2025.
Randall Bartlett, senior director of Canadian economics at Desjardins, tells Global News that he doesnāt see much further room for inflation to fall in the months ahead, with Septemberās sharp drop in gas prices unlikely to be repeated.
50 basis pointsā¦ or more?
But Bartlett adds that the rest of the countryās economic output is also coming in weaker than the Bank of Canada expected.
The central bankās most recent projections from July had real gross domestic product rebounding to 2.8 per cent in the third quarter of the year; actual results are tracking closer to 1.5 per cent, according to Desjardinsā analysis.
And outside of solid job gains in the most recent report for September, Canadaās labour market has also shown cracks through the summer, with the unemployment rate rising briefly to a seven-year high outside the pandemic.
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āThe unemployment rate is still pretty elevated and the trend is not the Bankās friend. It seems to be moving gradually higher over time, despite some wiggles,ā Bartlett says.
Hopes for any rapid improvement in the economic outlook have also been soured by the Bank of Canadaās own quarterly surveys tracking consumer and business sentiment, both of which showed little sign of a return to spending on the horizon.
āWe think all of this adds together ā¦ to suggest that a 50-basis-point rate cut is probably in the cards next week,ā Bartlett says.
Such a scenario would mark the first time in more than 15 years that the Bank of Canada cut its policy rate by 50 basis points, outside the pandemic years.
Desjardins was among early forecasters calling for a half-point cut in October, but theyāre far from the only ones.
Economists from big banks including Scotiabank, RBC, CIBC and BMO have pencilled in an oversized step this week. TD Bankās senior economist James Orlando acknowledged the growing case for a half-point cut in a note to clients, but argued that signs of resilience elsewhere in the labour market warrant another quarter-point move from the central bank.
As of Friday, Reuters said currency swap markets were pricing in an over 76 per cent chance of a 50-basis-point cut and another 25-basis-point reduction in December.
CIBC chief economist Avery Shenfeld even upped the ante in a note to clients last Friday.
While he maintained CIBCās call is for a 50-basis-point drop on Wednesday, he argued that a 75-basis-point āmega-moveā could be on the table as well.
With the belief that there will be at least 75 basis points of easing in the policy rate between now and the end of the year, Shenfeld argued the Bank of Canada may frontload its cuts to get ahead of the curve.
Thereās precedence for such movements, he noted, harkening back to the central bankās 100-basis-point hike back in July 2022, when monetary policymakers were rapidly tightening to get decades-high inflation back under control.
The U.S. looms large over the rate path
Movements in the United States could be what pushes the Bank of Canada to stick to 50 basis points, however, Shenfeld said in counter to his own argument.
The U.S. Federal Reserve kicked off its easing cycle in September with an oversized half-point cut of its own. Macklem has maintained that the governing council sets its policy rate based on conditions north of the border, though too wide a gap in rates between the Bank of Canada and the Fed can hurt the Canadian dollarās exchange rate, potentially exacerbating inflation on U.S. imports.
Bartlett notes that while the Bank of Canada is ājustifiedā in cutting by half a percentage point based on domestic factors, the Fedās big step and further cuts from other central banks around the world do āopen the doorā for Macklem and his compatriots to follow suit.
But recent strong economic data from the U.S. has scaled back expectations about the pace of easing from the Fed, Shenfeld noted. If the Bank of Canada is looking to avoid spooking financial markets with a larger, 75-basis-point move, it could keep to the already priced-in 50 basis points, he said.
Itās not just the Fedās easing cycle that will have the Bank of Canada looking south of the border in the months ahead.
The outcome of the U.S. presidential election will weigh heavily on the Canadian economy, and by extension, the Bank of Canadaās rate path, Bartlett says.
A Desjardins analysis from earlier this month anticipates a sharper decline in economic activity for both Canada and the U.S. in the event of a second Donald Trump presidency, rather than a Kamala Harris victory. Trump has threatened to levy blanket tariffs on imports to the U.S., a move that would depress Canadaās hopes for an economic rebound and could trigger a recession in the worst-case scenario.
āThe Bank of Canada will need to bring that in, both in terms of what the tariff impacts are going to be in the Canadian economy, but also weaker overall U.S. economic activity ā¦ and what the spillovers are to the Canadian economy,ā Bartlett says.
While such a move could hasten the Bank of Canadaās rate cuts in a bid to gird the economy, Bartlett notes it could be some time before the policies from a possible second Trump term filter through to the central bankās outlook.
The Bank of Canada would adjust its forecasts when specific policies are announced, he says, and are therefore unlikely to be factored in until the April monetary policy report ā a few months into the new presidentās tenure.
For the Bank of Canadaās final rate decision of the year in December, Bartlett argues the debate will likely be between 25 and 50 basis points once more, where more āsluggishā economic activity in the months ahead would point to the need for a steeper cut.
ā with files from Reuters
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