Bank of Canada Rate Cut Anticipated

By Promit Mukherjee
OTTAWA (Reuters) – The Bank of Canada is expected to reduce its key policy rate by 50 basis points on Wednesday due to weak unemployment figures and sluggish growth that highlight the need for economic support, according to economists and analysts.

Some analysts suggest that back-to-back rate cuts of 50 basis points might induce panic, indicating potential economic instability. Recent data shows Canadian economic growth fell short of the Bank of Canada's (BoC) third-quarter forecasts, with early indicators suggesting the GDP could also miss the fourth-quarter target. Four previous rate cuts, lowering the rate from 5% to 3.75%, have not effectively increased demand.

At this moment, inflation has remained within the Bank's target range of 1% to 3%, while unemployment has reached levels not seen for eight years outside of the pandemic impacts.

Dustin Reid, Vice President and Chief Strategist of Fixed Income at Mackenzie Investments, noted, "At the end of the day, the bank believes that the economy is operating in excess supply, and it will continue to do so until 2026." He suggests that the BoC should proceed with a rate cut to reach their neutral range.

The neutral range, where rates neither restrict nor stimulate economic growth, is situated between 2.25% and 3.25%. A further reduction of 50 basis points would adjust the rate to 3.25%, the upper limit of this neutral range. The central bank is slated to reveal its target for the overnight rate at 9:45 AM ET on Wednesday.

In a Reuters poll, 80% of the 27 economists surveyed predicted a 50 basis point reduction, while the remainder anticipated a quarter-point decline. Market expectations lean towards an 88% chance of the larger cut.

However, Royce Mendes, Head of Macro Strategy for Desjardins Group, cautioned that a 50 basis point cut might be a premature decision given the uncertainties surrounding the economy's future trajectory. Mendes stated, "The story of the Canadian economy and inflation is far more nuanced than the headline GDP, unemployment rate, or inflation rate suggest."