Economists are placing their bets on the Bank of Canada cutting interest rates by 50 basis points, as the central bank prepares to announce its latest interest rate decision on Wednesday.
BoC officials are facing pressure to act as downside risks to the Canadian economy become more apparent.
“Markets have thrown down their 50-basis point chip on the poker table, betting that the Bank of Canada will deliver an interest rate cut of that magnitude,” CIBC chief economist Avery Shenfeld said in a note to clients.
While Shenfeld acknowledged the possibility of a larger 75-bps cut, he believes the central bank is more likely to go with the 50-bps reduction, a move that would signal confidence in economic recovery prospects for 2025.
Inflation has been a key driver of these rate cut predictions. Headline inflation fell to 1.6% in September, down from the Bank of Canada’s 2% target in August. This drop, combined with weaker economic indicators, has led five of the six major Canadian banks to predict a sharper rate cut this month.
“What the economy tells us is that inflation, if anything, is going to slow even more,” said RBC economist Claire Fan, adding that the central bank is likely to highlight the risk of inflation falling below target rather than overshooting it.
Economic growth has also lagged behind expectations. The Bank of Canada’s July monetary policy report predicted gross domestic product (GDP) growth of 2.1% for the third quarter, but early estimates now suggest the figure will be closer to 1%.
“The Bank of Canada had a very high forecast for GDP,” said Beata Caranci, chief economist at TD Bank. “I don’t think anyone had forecasted as high… when they came out with that number.”
While September’s unemployment rate dipped slightly to 6.5%, it remains nearly a percentage point higher than the same time last year. Governor Tiff Macklem indicated last month that the central bank could consider faster rate cuts if growth continues to lag behind expectations. However, TD Bank remained cautious, predicting a smaller 25-bps cut.
“There is not a compelling case that they need to accelerate rate cuts at this stage,” Caranci explained. “Whether you get there six weeks early or not, is not as important as the signal you send to households and markets by doing an almost emergency-style cut when there is no fire to put out.”
She added that the absence of a serious rise in delinquency rates, along with concerns about reigniting housing market activity, support a more gradual approach.
Economists at the National Bank of Canada are among those calling for a steeper cut, predicting a 50-bps reduction not only this month but also at the Bank’s next meeting in December.
“To be sure, the Bank of Canada will still acknowledge some upside risks but expect more emphasis on the downside,” wrote National Bank economists Taylor Schleich and Warren Lovely. “This is why we argue that, at a minimum, the Bank of Canada will/should quickly get back to a more neutral policy stance, entailing a 50-basis-point cut on Wednesday and (another) in December.”
CMP
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