With Canadian inflation bottoming to just 1.6% in September is a “supersized” rate cut coming?
Economists at ING say they “would not be shocked” by such a development.
In an October 17 report, ING’s Chief International Economist James Knightly says with an interest rate announcement from the Bank of Canada on the table for October 23, we could see a move to trim 50 basis points off the BoC rate, which currently sits at 4.25%.
“A fourth consecutive Bank of Canada rate cut is expected, but the market senses it will accelerate the move towards neutral policy rates with a 50bp step change,” the economist wrote. “Inflation is finally below target and unemployment is trending higher, but the economy is still growing. We narrowly favour the BoC sticking with 25bp increments, but would not be shocked by 50bp.”
Knightly says it’s a “close call” whether or not the cut will be 25bp or 50bp, while noting that unemployment has climbed, not because of job losses but rather an influx of immigration.
“The Bank of Canada has lowered the target for the overnight rate at its past three policy meetings and is expected to follow up with a fourth consecutive cut next week,” he wrote. “The question is, will it be another 25bp move or will the bank follow the Federal Reserve’s lead and cut by 50bp? Consumer price inflation slowed to just 1.6% year-on-year in September, undershooting the 2% target for the first time since February 2021. The bulk of the residual strength is due to housing costs, which if excluded would prompt inflation to fall below 1%. Nonetheless, we can’t pick and choose which things to exclude and include, and BoC officials remain wary about easing too far, too fast and running the risk of a return of price pressures. At the September policy meeting, the committee argued that “excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. The Governing Council is carefully assessing these opposing forces on inflation”.
Comment