Posthaste: Why top economists are changing their Bank of Canada rate cut forecast
Just a week ago it was a coin toss whether the Bank of Canada would cut 25 basis points or 50 off its benchmark interest rate on Wednesday.
But that all changed Friday.
After the release of data that showed the jobless rate had hit a seven-year high, markets boosted expectations of a 50-bps cut to 80 per cent and two of the Big Six bank economists changed their forecast.
The Bank of Nova Scotia and Bank of Montreal joined the pack predicting the central bank will cut the interest rate to 3.25 per cent on Dec. 11.
The rise in unemployment to 6.8 per cent was enough to change the mind of economists led by BMO Capital Markets chief economist Douglas Porter.
“That’s the highest jobless rate in nearly eight years (again, apart from 20/21), and if there is one indicator that will stress the Bank of Canada, this would be the one,” said Porter in a note after the data.
“When the facts change, we change, and the sharp rise in the jobless rate is a big change, especially after two months of calm,” he said.
Porter stressed that a bigger cut is what BMO believes the Bank of Canada will do, not necessarily what it should do.
He says there is a “solid” case for a smaller cut as consumer demand comes back to life, core inflation picks up, the Federal Reserve turns cautious and the Canadian dollar sinks towards 20-year lows.
“But the Bank seems biased to ease quickly, and the high jobless rate provides them with a ready invitation,” said Porter.
Scotiabank Economics vice-president Derek Holt now sees a 70 per cent of a 50-bps cut this week, though he argues that his interpretation of the jobs report recommends against it.
He believes the central bank will prioritize the risk of inflation dropping too low over the risk of inflation
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