Markets had believed a 25-basis-point reduction was on the way – but an even bigger move is now anticipated amid weak economic data
Odds of an oversized interest rate cut by the Bank of Canada are strengthening ahead of the central bank’s last rate decision of the year on Wednesday (December 11), with rising unemployment and a weakening labour market seeing expectations swing towards a 50-point reduction.
The Bank had already been widely predicted to continue lowering rates in December with overall inflation well within the 1-3% target range and policymakers giving little indication in recent months of a willingness to hit pause on cuts.
But financial markets increasingly view a larger-than-usual move as the likely outcome of Wednesday’s meeting thanks to a spate of weak economic data including a jump in the unemployment rate to 6.8%, its highest level since 2021 and an eight-year record outside of the pandemic.
Former Bank of Canada governor Stephen Poloz said last week he believes the country is currently in a recession, with only population growth papering over the economy’s poor performance.
Stephen Poloz, former Bank of Canada governor, says Canada is in a recession, with immigration skewing economic data. He warns U.S. tariffs could lead to stagflation and complicate interest rate decisions.https://t.co/x3qt3504PD#CanadaEconomy #Recession
— Canadian Mortgage Professional Magazine (@CMPmagazine) December 4, 2024
Major banks including Bank of Montreal (BMO) and Scotiabank adjusted their forecast for Wednesday’s decision to a 50-point cut in the wake of the latest jobs data, while interest-rate swap markets now see an 85% chance of that oversized move.
Doug Porter, BMO’s chief economist, described the November jobless increase as a “big change” in the economic outlook. “If there is one indicator that will stress the Bank of Canada, this would be the one,” he wrote after Friday’s Statistics Canada labour market release.
Could a big rate cut risk further damage to the loonie?
Still, the Canadian dollar’s recent dive could give the Bank pause for thought on making a larger cut than previously anticipated. The threat by president-elect Donald Trump of a blanket tariff on Canadian goods entering the US sent the loonie plunging two weeks ago, and the Federal Reserve has also been cutting rates at a slower pace than the Bank of Canada – meaning another jumbo reduction by the Bank would widen the gap and potentially damage the dollar north of the border even further.
Porter suggested that while the Bank is likely to move by 50 basis points, there remains a “solid” case for a more modest reduction.
Meanwhile, Derek Holt, vice president at Scotiabank Economics, said he “hated” the prospect of a 50-point cut and described it as the “wrong thing to do,” but CIBC Capital Markets’ Avery Shenfeld said there was no reason not to view the move as a sensible one if the Bank plans to lower its overnight rate beyond 3% in the months ahead.
The central bank has already lowered that trendsetting interest rate four times throughout the year to date, most recently trimming by 50 basis points in its October 23 decision. Another 0.5% reduction would bring the rate down to 3.25%, from a high of 5.0% in June of this year.
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