Posthaste: Odds of a half-point Bank of Canada cut are rising, say these economists
The Bank of Canada is widely expected to continue cutting its benchmark interest rate tomorrow and at meetings to come, but how quickly the rate comes down is open to debate.
A quarter-point cut looks most likely on Sept. 4, but could October bring a bigger reduction?
Markets and most economists think a 50-basis-point cut is unlikely this cycle but some argue that the chances of something bigger are rising.
While the economy grew more than expected in the second quarter, that growth slowed sharply in May and June, suggesting the third quarter will be weaker than forecast, said Stephen Brown, Capital Economics’ deputy chief North America economist.
“That raises the chance of the bank enacting a 50bp cut during this cycle, although the pace of policy loosening will still be dependent mainly on the inflation data,” he said.
Royce Mendes, managing director and head of macro strategy for Desjardins Group, says that the Bank of Canada is in a race against time to lower rates ahead of the mortgage renewal wall.
Desjardins sees 25 bps cuts at each of the bank’s next six decisions, a pause and then more cutting until the rate reaches 2.25 per cent by the end of 2025.
“While that was previously seen as a very dovish forecast, the risk now is that rates fall faster to that terminal level,” said Mendes.
The discourse has changed, not just in Canada, but in the United States and beyond, as central bankers switch their focus to the deterioration of the labour market.
“Given that inflation has been all but tamed, we think there’s actually a somewhat more material chance that a 50bp rate cut will be required before the end of the year,” he said.
Citigroup economists too are calling for a 50 basis-point cut in October, Bloomberg reports.
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