Bank of Canada could cut another half point in December, say economists

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The Bank of Canada supersized its fourth consecutive interest rate cut to 50 basis points from the standard 25 basis points, bringing its benchmark lending rate below four per cent for the first time in two years.

Policymakers started cutting in June, when the rate stood at a more than two-decade high of five per cent.

Here’s what economists are saying about where the Bank of Canada goes from here.

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‘Another 50 bps in December’: Capital Economics

The central bank, in its statement accompanying the rate decision, said the economy is struggling on several fronts, from excess supply, as higher rates continue to tamp down consumer spending, to a softening labour market.

Brown thinks it’s “unlikely” Wednesday’s larger-than-usual cut is a “one-off” given that the Bank of Canada downgraded its forecast for third-quarter gross domestic product (GDP) to 1.5 per cent annualized in its updated Monetary Policy Report (MPR) from 2.8 per cent in the previous MPR.

For the fourth quarter, the Bank of Canada expects GDP of two per cent — “a modest pickup.”

Brown said policymakers are looking to bolster growth, but “nonetheless, the (central) bank does not seem confident that growth is on the cusp of accelerating strongly.”

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He expects the policy rate will be cut to 3.25 per cent after the bank meets on Dec. 11, with a few more cuts in 2025 to arrive at a terminal rate of 2.25 per cent, “although the risks to that terminal rate forecast now seem to lie to the downside.”

Watch out for the loonie: RSM Canada

The Bank of Canada has shifted its focus from inflation to trying to fuel some growth in Canada’s slowing economy, Tu Nguyen, an economist at tax consultancy RSM Canada LLP, said in a note.

Canada has posted five straight quarters of falling GDP per capita, so she thinks that will spur policymakers to get the lending rate to neutral — where it neither stimulates nor suppresses growth — as fast as possible, especially given that “disinflation is spreading. Headline inflation has fallen below two per cent and the bank’s preferred measure of core inflation has fallen below 2.5 two per cent.”

Nguyen said inflation excluding mortgage interest costs stands at one per cent, which is at the bottom of the Bank of Canada target range of one per cent to three per cent.

“Since interest payments play a nontrivial role in driving inflation, rate cuts will further bring down interest payments and thus inflation,” she said.

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Where policymakers go from here will depend on upcoming jobs and inflation data, but also what the United States Federal Reserve does at its next rate meeting Nov. 7, she said.

Markets believe another 50-basis-point cut by the Fed is off the books, given the strength of the U.S. economy.

“As much as the (Bank of Canada) is independent from the Fed, deviating too far from the Fed risks causing the loonie to lose even more value,” Nguyen said.

As it stands, she expects rates to fall to 3.5 per cent as the bank reverts to a standard 25-basis-point cut in December, and the cutting cycle to end at 2.75 per cent in early 2025.

‘No-brainer’: CIBC

The Bank of Canada’s 50-basis-point cut was a “no-brainer,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note, adding “it would take a significant turn of events to stand in the way of another cut of that magnitude in December.”

Policymakers declared victory in their fight against inflation in their statement, Shenfeld said, while still keeping their cards close to their chests when it comes to the size of any future rate cuts.

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The central bank is looking for growth to pick up over the next two years and average 2.2 per cent, but he said that doesn’t mean it is “by any means ruling out further interest rate relief, as softer monetary conditions are cited as the driver for the improvement.”

Five 25 bps cuts coming: BMO

The Bank of Canada has now trimmed rates by 125 basis points this year, which is the “most aggressive set of cuts among the major central banks globally,” Douglas Porter, chief economist at the Bank of Montreal, said in a note.

He said that while the central bank missed on its third-quarter GDP estimates, it hasn’t altered its growth forecasts for 2024 and 2025 and only “shaved” its outlook for headline inflation.

“But the two-year view on core has not budged,” he said.

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Porter said Wednesday’s jumbo cut came “mostly” due to the significant slowdown in inflation over the past few months, but he thinks the central bank’s overall outlook for inflation and the economy “suggest default moves will be 25-bps steps,” unless growth or inflation dictate otherwise.

BMO is calling for five more 25-basis-point cuts to bring the terminal rate to 2.5 per cent by June 2025, “at the low end of the (central) bank’s 2.25 per cent 3.25 per cent range for neutral.”

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