Bank of Canada expected to make jumbo rate cut on Oct. 23

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The Bank of Canada is set to make its next interest rate decision on Wednesday, with most economists predicting a jumbo 50-basis-point cut.

“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,” said Avery Shenfeld, chief economist with the Canadian Imperial Bank of Commerce, in a note to clients.

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Shenfeld even mused the bank could go as high as 75 basis points, as a means of presenting an “optimistic growth outlook for 2025,” although he said  it’s more likely the central bank will call the market’s bet at 50 basis points.

Downside risks to the economy have been more of a focus for the bank since the summer. Headline inflation fell to 1.6 per cent in September, after hitting the Bank of Canada’s two-per cent target in August. After the latest inflation reading was released, five of the six major Canadian banks were betting on a steeper cut from the central bank this month.

“What the economy tells us is that inflation, if anything, is going to slow even more,” said Claire Fan, an economist with the Royal Bank of Canada. “The bank will probably continue to highlight this risk of not only inflation overshooting their target but undershooting their target.”

The Bank of Canada’s monetary policy report in July initially predicted gross domestic product (GDP) growth would be 2.1 per cent for the third quarter, but early estimates suggest that figure will end up closer to one per cent.

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“The Bank of Canada had a very high forecast for GDP,” said Beata Caranci, chief economist with Toronto-Dominion Bank. “I don’t think anyone had forecasted as high … when they came out with that number.”

Last month, Bank of Canada governor Tiff Macklem said the central bank would consider faster cuts if growth did not pick up. While unemployment in September ticked down to 6.5 per cent, the jobless rate is almost a percentage higher than a year ago.

TD Bank is the only bank that is still predicting a 25-basis point cut this Wednesday. Caranci thinks there is no need to accelerate a rate cycle that has already been priced in.

“There is not a compelling case that they need to accelerate rate cuts at this stage,” said Caranci. “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.”

Caranci added the absence of worrisome rises in delinquency rates coupled with the potential to reignite housing market activity, should be factors that favour slower cuts.

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As for the rest of the year, the central bank has one more policy rate announcement in December, with National Bank of Canada economists Taylor Schleich and Warren Lovely predicting another cut of 50 basis points at that meeting as well.

“To be sure, the Bank of Canada will still acknowledge some upside risks but expect more emphasis on the downside,” they said, in a note to clients. “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.”

Meanwhile, Bank of Montreal chief economist Douglas Porter thinks that after a 50 basis point cut on Wednesday, the central bank will continue a steady stream of 25 basis points until the rate returns to neutral next year.

“We are sticking with our call that this meeting will be followed by a series of 25 bp cuts, ultimately taking the overnight rate to 2.5 per cent (but now getting there one meeting sooner),” he said in a note to clients.

• Email: jgowling@postmedia.com

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