The days of second guessing whether the Bank of Canada will cut its overnight rate are well behind us, with three .25% on the books in 2024. The bank makes another rate announcement on Wednesday and a cut is definitely in order, the only question being will it be another .25%, or a ‘jumbo’ cut of .5% or potentially a ‘mega’ cut of .75%. With the bank facing downside risks to the Canadian economy, even with inflation dropping to 1.5% in September, most economists in the country feel the cut will be .5% In a note to clients, Avery Shenfield, CIBC’s chief economist, wrote, “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.” Shenfeld does not rule out a .75% cut, but says a .5% reduction is more likely as a move signalling confidence in economic recovery prospects for 2025. “While a mega-move isn’t our base-case forecast, there are reasons to think that Governor Macklem’s team will give such a move more consideration than the 25 basis point cut that some economists are still projecting,” wrote Shenfeld. The Bank of Canada’s monetary policy report in July expected gross domestic product growth of 2.1%, but now estimates are it 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.” September's unemployment rate in Canada slipped to 6.5%, almost a percentage point higher than September 2023, with Bank of Canada Governor Tiff Macklem saying last month the bank might make faster rate cuts if growth continues to lag behind expectations. Caranci said TD Bank’s expectations remain cautious, predicting a cut at the lower end at .25%. “There is not a compelling case that they need to accelerate rate cuts at this stage,” she said. “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,” adding the absence of a serious rise in delinquency rates, along with concerns about reigniting housing market activity, support a more gradual approach. National Bank economists Taylor Schleich and Warren Lovely wrote in a client note they expect a .5% rate cut, not just on Wednesday, but also in December. “To be sure, the Bank of Canada will still acknowledge some upside risks but expect more emphasis on the downside,” they wrote. “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.” RBC Economist Nathan Janzen also believes in a .5% cut on Wednesday and a similar cut in December. “An underperforming Canadian economy had already pushed the BoC to lower interest rates earlier than most advanced economy central banks,” Janzen wrote in a note, pointing to gross domestic product having grown just 0.2% at last count. “Three consecutive 25 bps cuts that began in June are already in the books,” he wrote. “Yet, the economic backdrop has continued to soften, and risks to inflation look increasingly tilted to the downside of the BoC’s 2% target.” RBC’s prediction past December’s .5% cut into mid-next year is for a bank rate of 2%, anticipating the bank will “accelerate the pace of interest rate cuts on Wednesday with a 50-basis point reduction to the overnight rate to 3.75%.” “What the economy tells us is that inflation, if anything, is going to slow even more,” said RBC economist Claire Fan, adding the central bank is likely to highlight the risk of inflation falling below target rather than overshooting it. Scotiabank Economist Derek Holt believes the odds favour a .5% cut. “(A lower cut of) 25bps would be preferred, but I would assign 65% odds to a 50 bps cut, 25% odds to a quarter point, and the residual 10% odds to the risk of an even bigger cut,” wrote Holt. “Our forecast is marked by considerable uncertainty in both directions, but at this point we think the rate will decline to 3% by spring and stay there throughout the rest of 2025 as the nearer-term terminal rate.” “That would bring the rate into the BoC’s currently estimated neutral rate range of 2.25% to 3.25% with a 2.75% midpoint.” Holt says there could be a “mega cut” on the horizon, citing “excess capacity in the economy measured by a negative output gap that indicates supply exceeds demand which is one driver of disinflationary pressures,” and “the preferred measures of core inflation [that] are on the BoC’s 2% headline inflation target in month-over-month terms at a seasonally adjusted and annualized rate.” The bank makes its announcement at 7:25 am MDT on Wednesday.
The days of second guessing whether the Bank of Canada will cut its overnight rate are well behind us, with three .25% on the books in 2024. The bank makes another rate announcement on Wednesday and a cut is definitely in order, the only question being will it be another .25%, or a ‘jumbo’ cut of .5% or potentially a ‘mega’ cut of .75%. With the bank facing downside risks to the Canadian economy, even with inflation dropping to 1.5% in September, most economists in the country feel the cut will be .5% In a note to clients, Avery Shenfield, CIBC’s chief economist, wrote, “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.” Shenfeld does not rule out a .75% cut, but says a .5% reduction is more likely as a move signalling confidence in economic recovery prospects for 2025. “While a mega-move isn’t our base-case forecast, there are reasons to think that Governor Macklem’s team will give such a move more consideration than the 25 basis point cut that some economists are still projecting,” wrote Shenfeld. The Bank of Canada’s monetary policy report in July expected gross domestic product growth of 2.1%, but now estimates are it 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.” September's unemployment rate in Canada slipped to 6.5%, almost a percentage point higher than September 2023, with Bank of Canada Governor Tiff Macklem saying last month the bank might make faster rate cuts if growth continues to lag behind expectations. Caranci said TD Bank’s expectations remain cautious, predicting a cut at the lower end at .25%. “There is not a compelling case that they need to accelerate rate cuts at this stage,” she said. “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,” adding the absence of a serious rise in delinquency rates, along with concerns about reigniting housing market activity, support a more gradual approach. National Bank economists Taylor Schleich and Warren Lovely wrote in a client note they expect a .5% rate cut, not just on Wednesday, but also in December. “To be sure, the Bank of Canada will still acknowledge some upside risks but expect more emphasis on the downside,” they wrote. “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.” RBC Economist Nathan Janzen also believes in a .5% cut on Wednesday and a similar cut in December. “An underperforming Canadian economy had already pushed the BoC to lower interest rates earlier than most advanced economy central banks,” Janzen wrote in a note, pointing to gross domestic product having grown just 0.2% at last count. “Three consecutive 25 bps cuts that began in June are already in the books,” he wrote. “Yet, the economic backdrop has continued to soften, and risks to inflation look increasingly tilted to the downside of the BoC’s 2% target.” RBC’s prediction past December’s .5% cut into mid-next year is for a bank rate of 2%, anticipating the bank will “accelerate the pace of interest rate cuts on Wednesday with a 50-basis point reduction to the overnight rate to 3.75%.” “What the economy tells us is that inflation, if anything, is going to slow even more,” said RBC economist Claire Fan, adding the central bank is likely to highlight the risk of inflation falling below target rather than overshooting it. Scotiabank Economist Derek Holt believes the odds favour a .5% cut. “(A lower cut of) 25bps would be preferred, but I would assign 65% odds to a 50 bps cut, 25% odds to a quarter point, and the residual 10% odds to the risk of an even bigger cut,” wrote Holt. “Our forecast is marked by considerable uncertainty in both directions, but at this point we think the rate will decline to 3% by spring and stay there throughout the rest of 2025 as the nearer-term terminal rate.” “That would bring the rate into the BoC’s currently estimated neutral rate range of 2.25% to 3.25% with a 2.75% midpoint.” Holt says there could be a “mega cut” on the horizon, citing “excess capacity in the economy measured by a negative output gap that indicates supply exceeds demand which is one driver of disinflationary pressures,” and “the preferred measures of core inflation [that] are on the BoC’s 2% headline inflation target in month-over-month terms at a seasonally adjusted and annualized rate.” The bank makes its announcement at 7:25 am MDT on Wednesday.
