Many economists expect the Bank of Canada to make an oversized interest rate cut in its upcoming decision. The central bank has been proceeding with cautious 25-basis-point cuts in the past but may change its approach due to recent changes in the economy. Inflation has dropped from the Bank of Canada’s target of two percent to 1.6 percent, and Governor Tiff Macklem is concerned about inflation falling too low. Economic output and GDP growth have also been weaker than expected, leading to predictions of a half-point rate cut.
Analysts have noted that there may not be much room for inflation to fall further, especially after a sharp drop in gas prices in September. Despite solid job gains, the unemployment rate remains elevated and is gradually increasing. Consumer and business sentiment surveys show little sign of an economic recovery, leading to the expectation of a 50-basis-point rate cut. This would be the first time in over 15 years that the Bank of Canada has cut its policy rate by 50 basis points outside of the pandemic years.
Various economists from big banks have predicted an oversized rate cut this week, with some suggesting a 75-basis-point “mega-move.” While there is a growing case for a half-point cut, signs of resilience in the labor market may support another quarter-point move. The U.S. Federal Reserve’s easing cycle may influence the Bank of Canada’s decision, as a wide gap in rates between the two countries could impact the Canadian dollar’s exchange rate. Recent strong economic data from the U.S. has scaled back expectations about the pace of easing from the Fed, potentially affecting the Bank of Canada’s decision.
The outcome of the U.S. presidential election will also impact the Canadian economy and the Bank of Canada’s rate path. A second Donald Trump presidency could lead to decreased economic activity and potential recession, affecting Canada’s economic rebound. The Bank of Canada will need to consider the impact of potential tariffs on the Canadian economy and adjust its forecasts accordingly. It may take some time for policies from a possible second Trump term to filter through the Bank of Canada’s outlook, likely not factoring in until the April monetary policy report. The final rate decision of the year in December may see a debate between 25 and 50 basis points, depending on economic activity in the months ahead.
