Bank of Canada most likely to cut rates by 50 bps next week
By Promit Mukherjee
OTTAWA (Reuters) – The Bank of Canada is widely expected to reduce its key policy rate by 50 basis points on Wednesday, its fourth cut in a row and what would be the first super-sized reduction in more than 15 years outside of the pandemic era.
A jumbo cut next week, as most economists and analysts are predicting, would bring down the benchmark rate to 3.75% from 4.25% as the bank seeks to boost economic growth amid falling prices and stifled spending by consumers and businesses.
After a year of 5% rates, a more than two-decade high, the bank began its trimming cycle in June as consumer prices showed consistent signs of cooling and economic growth continued to weaken.
BoC Governor Tiff Macklem said last month that the bank had to increasingly guard against the risk of a hobbled economy and inflation sliding too much, indicating a possibility of bigger cuts.
“The bank has identified their concern about downside risks to the economy and inflation,” said Tony Stillo, director at analysis group Oxford Economics, and a raft of data since the last policy meeting had escalated these concerns, he added.
“We are heading for a 50 basis point rate cut,” he said.
The BoC will announce its monetary policy decision on Oct. 23 at 9:45 a.m. ET (1345 GMT).
It will also release the quarterly Monetary Policy Report, which will include fresh forecasts on 2024 economic growth and inflation. Economists expect them to be lower than previous forecasts.
Headline inflation for September came in at 1.6%, below the bank’s mid-point of its 1% to 3% target range, but consumer and business spending has not improved, the housing market has stagnated and the economy has sputtered.
Canada’s gross domestic product expanded at a meager 0.2% rate in July, and an advance estimate indicated it likely stalled in August. Economists expect growth to fall well below the central bank’s third quarter estimate of 2.8%.
In a Reuters poll, two-thirds of economists, 19 of 29, forecast the BoC would cut rates by one half-percentage point to 3.75% on Oct 23. This is up from a single economist expecting a bigger cut in an August poll and follows the U.S. Federal Reserve making a 50-point cut in September.
Currency swap markets are pricing in an over 76% chance of a 50 basis point cut next week and another 25 basis point reduction in December.
The monetary policy report will have “an acknowledgement that the economy hasn’t been as strong as they’ve been indicating,” David Doyle, head of economics at Macquarie, said.
Previously, the bank had gone for an over-sized half a percentage point reduction on March 27, 2020, the start of the pandemic, when rates were brought down to 0.25% from 0.75%. But apart from the pandemic era, it last cut rates by this size were on March 3, 2009, to 0.5% from 1%.