Introduction to Interest Rates
Economists are predicting that the Bank of Canada will lower its key interest rate by another 25 basis points to 2.25 per cent. This decision is expected to be made today, and it’s largely influenced by the current economic conditions.
Understanding the Reasoning
While inflation has risen to 2.4 per cent in September, which is above the central bank’s target of two per cent, experts believe that another rate cut would bring the overnight rate to the lower end of the Bank of Canada’s estimated neutral range of 2.25 to 3.25 per cent. According to RBC economist Claire Fan, this would mean that the interest rates would still be at levels that would not significantly add to inflation pressures over time.
Labour Market and Economic Slack
The labour market data also supports the case for looser policy. The unemployment rate remained high at 7.1 per cent last month, despite the addition of 60,400 new jobs. Furthermore, economic slack continues to build, a trend seen in the Bank’s third-quarter Business Outlook Survey, which reflected a pessimistic near-term outlook. Firms are keeping hiring and investment plans on hold due to weak demand and uncertainty.
External Factors
External factors, such as the trade outlook, are also weighing on the economy. The hopes for a near-term trade deal have been dashed after U.S. President Donald Trump suspended negotiations last week. This deterioration in the trade outlook and its impact on key sectors have led economists to predict a Bank of Canada rate cut. BMO Capital Markets economist Douglas Porter believes that it makes sense for rates to go to the very low end of neutral, or even a bit below, to support the economy through this difficult episode.
Expected Outcome
National Bank economic analyst Ethan Currie expects the Governing Council to lower the overnight rate again today by 25 basis points to 2.25 per cent. He believes that a ‘one and done’ cut is unlikely, as history suggests that it’s rare for the Bank to come off the sidelines to cut, only to retreat to the sidelines again.
Conclusion
In conclusion, the Bank of Canada’s expected decision to lower its key interest rate is influenced by a combination of factors, including labour market data, economic slack, and external factors such as the trade outlook. Economists believe that this decision will help support the economy through a difficult episode, and it’s unlikely to be a one-time cut. The expected outcome is a lower interest rate, which will have implications for the economy and individuals alike.
