Introduction to Interest Rate Cuts
Most economists expect the Bank of Canada to deliver a second consecutive interest rate cut this week, despite strong jobs data and signs of stubbornness on the inflation front. BMO chief economist Doug Porter is among those expecting a second straight cut, but he admits recent economic data hasn’t perfectly lined up with that call.
Economic Data and Interest Rates
The two major economic reports since the Bank of Canada last decided on interest rates were a strong jobs report and a bit higher than expected inflation report. Taken in isolation, you would think there’s no reason for the bank to be cutting interest rates. The Bank of Canada lowered its benchmark interest rate by a quarter point to 2.5 per cent in late September, snapping a streak of three consecutive rate holds since March.
Market Odds and Economic Context
As of Friday, LSEG Data & Analytics put financial market odds at more than 80 per cent in favour of a second quarter-point cut at the central bank’s decision on Wednesday. Earlier this month, Statistics Canada reported a surprise gain of roughly 60,000 jobs in September. Inflation data for that month also accelerated to 2.4 per cent, up half a percentage point from August, with the Bank of Canada’s preferred measures of core inflation holding above three per cent.
Broader Economic Context
Despite the surprise employment gain in September, the labour market has barely posted any job growth since January as U.S. trade uncertainty restrains businesses’ hiring appetites. Porter argued that Canada’s jobs market needs relief from lower rates with the unemployment rate still elevated at 7.1 per cent. The Bank of Canada has also cast some doubt on the reliability of its own core inflation metrics, instead telling Canadians that monetary policymakers see inflation around 2.5 per cent right now.
Economist Expectations
Economists at RBC also believe the Bank of Canada has a tough call to make this week. Economists Nathan Janzen and Claire Fan said in a note to clients that signs of weakness in the labour market and lower inflation expectations in the central bank’s business outlook survey published last week should give monetary policymakers confidence that inflation will cool further going forward. BMO sees the Bank of Canada continuing to cut interest rates to a low of two per cent before finishing the current easing cycle.
Fiscal Policy and Monetary Policy
The Bank of Canada will have to make its rate decision before getting a sense of the federal government’s spending plans coming in the fall budget on Nov. 4. Porter said recent announcements that automakers Stellantis and GM are either pausing some Canadian production or moving it south of the border show what an "exceptionally challenging" time it is for the economy. While he also expects stimulative government spending to come from the federal budget next month, he said Canada is grappling with "once in a lifetime uncertainty on the trade front," warranting a strong response from both monetary and fiscal policy.
Conclusion
In conclusion, the Bank of Canada is expected to deliver a second consecutive interest rate cut this week, despite strong jobs data and signs of stubbornness on the inflation front. Economists believe that the broader economic context, including a labour market that needs relief and uncertainty on the trade front, warrants a strong response from both monetary and fiscal policy. The Bank of Canada’s decision will be closely watched, and its impact on the economy will be felt in the coming months.
