Bank of Canada likely to reduce interest rate by 50bps
2024.12.11 06:48
By Promit Mukherjee
OTTAWA (Reuters) – The Bank of Canada is poised to cut its key policy rate by another 50 basis points on Wednesday as weak unemployment numbers and poor growth underscore an economy that needs support, economists and analysts said.
A minority argued that reducing borrowing costs by 50 basis points two times in a row could create a sense of panic, suggesting that the economy is teetering.
Canada’s economic growth came in lower than BoC’s third-quarter prediction and early indicators show that the GDP might also miss its fourth-quarter target. Four rounds of rate cuts from 5% to 3.75% have not managed to stoke demand.
This comes at a time when inflation has continued to stay within the BoC’s 1% to 3% target range and unemployment has matched a level not seen since eight years ago outside of the pandemic.
“At the end of the day, the bank believes that the economy is operating in excess supply, and that it will operate in excess supply until 2026,” said Dustin Reid, vice president and chief strategist, Fixed Income from Mackenzie Investments.
“Why wait and not get to your neutral range?” he said, adding that he expects the bank to cut by 50 basis points.
The neutral range is considered to be the band within which rates are just enough to not restrictive economic growth but not stimulate it either.
The BoC, which considers the neutral range between 2.25% and 3.25%, slashed rates by a super-sized half a percentage point in October, saying it needs demand to pick up so the economy can avoid recession.
Another jumbo reduction of 50 basis points would bring rates down to 3.25%, the top end of the neutral rate.
The central bank will announce its target for the overnight rate at 945 am ET on Wednesday.
In a Reuters poll of economists, 80%, or 21 out of 27 respondents, predicted that the bank will cut the overnight rate by 50 basis points. The rest forecast a quarter-point reduction.
Currency markets are betting on the chance of a half a percentage point cut at 88%.
But Royce Mendes, head of macro strategy for Desjardins Group, said that a cut of 50 basis points could turn out to be a policy error at a time when there are several unknowns regarding how the economy will evolve.
“The story of the Canadian economy and inflation is far more nuanced than the headline GDP, unemployment rate or inflation rate suggest,” Mendes wrote in a report.
