Opinion: If inflation falls again, BoC should cut interest rates 50 points

financialpost.com:

By Steve Ambler and Jeremy Kronick

It is rare for the Bank of Canada to change its policy interest rate by more than 25 basis points, either up or down. Big changes have been reserved for crises, like the beginning of the pandemic, when the Bank made three 50-basis-point cuts in a single month, or when inflation is running out of control, as it was in late 2022 when the bank raised its rate by 50 basis points. Last week’s news that inflation has returned to the bank’s two per cent target does not signal a crisis but in our view it does mean a larger-than-normal cut is called for. Without an aggressive cut, the economy could tip into a needless recession.

It’s been a long road since inflation first rose above its official two per cent target in March 2021. It peaked at 8.1 per cent in June 2022, before interest rate hikes started to work their way through the economy. Last month, two years and two months later, the CPI finally came in at its two per cent target — for the first time since February 2021.

One of the key concepts in central banking is the “neutral interest rate,” a term used to describe a situation where the economy is operating at its potential and inflation is sustainably at its target. The bank estimates this neutral rate to be in a range from 2.25 to 3.25 per cent. Today the policy interest rate, the overnight rate, is 4.25 per cent — 100 to 200 basis points above the neutral rate. That means monetary policy is still tight. If the policy rate remains above neutral, inflation will likely continue to fall.

The questions of the hour are how much to cut and how quickly? There are good reasons not to lower the policy rate by the full 100 basis points at the next meeting. First, the range for the neutral rate