Posthaste: Odds of a half-point Bank of Canada cut are rising, say ...
How quickly interest rates will come down is still up in the air
Published Sep 03, 2024 • Last updated 2 hours ago • 4 minute read
The Bank of Canada is widely expected to continue cutting its benchmark interest rate tomorrow and at meetings to come, but how quickly the rate comes down is open to debate.
A quarter-point cut looks most likely on Sept. 4, but could October bring a bigger reduction?
Markets and most economists think a 50-basis-point cut is unlikely this cycle but some argue that the chances of something bigger are rising.
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While the economy grew more than expected in the second quarter, that growth slowed sharply in May and June, suggesting the third quarter will be weaker than forecast, said Stephen Brown, Capital Economics’ deputy chief North America economist.
“That raises the chance of the bank enacting a 50bp cut during this cycle, although the pace of policy loosening will still be dependent mainly on the inflation data,” he said.
Royce Mendes, managing director and head of macro strategy for Desjardins Group, says that the Bank of Canada is in a race against time to lower rates ahead of the mortgage renewal wall.
Desjardins sees 25 bps cuts at each of the bank’s next six decisions, a pause and then more cutting until the rate reaches 2.25 per cent by the end of 2025.
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“While that was previously seen as a very dovish forecast, the risk now is that rates fall faster to that terminal level,” said Mendes.
The discourse has changed, not just in Canada, but in the United States and beyond, as central bankers switch their focus to the deterioration of the labour market.
“Given that inflation has been all but tamed, we think there’s actually a somewhat more material chance that a 50bp rate cut will be required before the end of the year,” he said.
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Citigroup economists too are calling for a 50 basis-point cut in October, Bloomberg reports.
A lot depends on where the economy goes from here and economists will be watching the data closely, including reports out Friday on the labour market from both sides of the border.
“Friday’s job numbers have maximum importance because, if they’re feeble again, the BoC may have no choice but to cut 50 bps at an upcoming meeting,” said MortgageLogic.news analyst Robert McLister.
“There’s even a 21 per cent implied chance of that (-50 bps) happening this Wednesday.”
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Financial PostThe Canadian economy grew more than expected in the second quarter, the latest data show, but economists say a closer look at the details suggest it’s not as strong as it appears.
“By our count a surge in government spending accounted for 80 per cent of the Q2 GDP increase,” said Abbey Xu, an economist with Royal Bank of Canada.
Meanwhile, consumer spending almost stalled, growing at just 0.6 per cent.
Momentum also appears weak with both June GDP and an early estimate for July coming in flat.
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“This is a clear case of there being less than meets the eye for growth. While the headline advance of more than 2 per cent for Q2 is certainly welcome, it comes with a wide variety of “yes, buts,” said Douglas Porter, chief economist at BMO Capital Markets.
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McLister on mortgagesWant to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.
Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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