Posthaste: Why the Bank of Canada could cut interest rates much more than markets expect
The Bank of Canada is widely expected to hold its benchmarkinterest rate when it meets next week, but a lot has changed since October.
Cooling inflation, here and south of the border, and a weakening economy have turned markets’ attention from rate hikes to rate cuts.
Investors are now fully pricing in a 25 bps rate cut by April, a 75 per cent chance by March and even a 20 per cent chance by next week.
Stephen Brown, deputy chief North American economist for Capital Economics, thinks odds of a cut as early as next week are way off the mark, but also believes markets are underestimating the degree of policy loosening to come in 2024.
Capital expects the Bank will tone down or even drop its tightening bias next week because of developments since its last meeting in October.
Oil prices, a big driver of inflation, have fallen back after a spike over the Israel-Hamas war to below what the Bank forecast in its October monetary policy report. Gas prices are at their lowest since March.
Capital now expects that headline inflation will average 3.1 per cent this quarter compared to the Bank’s forecast of 3.3 per cent.
The economy is also looking weaker than the Bank expected, said Brown. Gross domestic product data out today showed the economy in the third quarter shrank at a 1.1 per cent annualized pace, weaker than the Bank’s forecast of 0.8 per cent.
Other indicators support this. “According to the CFIB Business Barometer, the share of firms suffering from insufficient domestic demand jumped to 44 per cent in October, which implies that GDP is close to 1.5 per cent below its potential,” said Brown.
He also expects that jobs data out tomorrow will show a small rise in unemployment and slowing wage growth, “which should help to
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