Big bank economists are moving closer to a consensus but questions remain
The Bank of Canada has an important decision to make this week; does it make a jumbo interest rate cut of 50 basis points, or take a more cautious approach with a 25bps cut?
The crucial role of data is clear, but the mix of recent data muddies the water slightly. Following the recent GDP stats showing slower growth for the economy, some major Canadian bank economists felt that a larger rate cut was needed, while others pointed to underlying economic strength as justification for a less urgent path to lower rates.
Friday’s labour report has added new concerns about the impact of interest rates on the economy, but was the increase in the unemployment rate to 6.8% (up 0.3 percentage points) to 1.5 million people, enough to change the minds of the 25bps advocates?
Among those who remain resolute that a jumbo cut is required are RBC’s Nathan Janzen.
“Details underlying the November labour market data were mixed but the rise in the unemployment rate (alongside a slowing in wage growth) should reinforce that interest rates are higher than they need to be to keep inflation at the BoC’s inflation target. Our base-case expectation remains that the BoC will cut the overnight rate by another 50 basis points next week,” he wrote in his analysis.
CIBC’s Andrew Grantham was less certain of a 50bps cut following the GDP data but said then that the jobs report would be “key in the final decision.” With that information now published, Grantham and his economics colleagues are now in the jumbo camp.
“The greater-than-expected increase in unemployment, weakness in hours worked and deceleration in wage growth all support our call for a 50bp cut by the Bank of Canada,” wrote Grantham, adding that rates may need to fall below a neutral level in 2025 to boost growth and reduce slack in the economy.
At National Bank, Matthieu Arseneau is also favouring a jumbo cut: “The door seems wide open for the Bank of Canada to lower its policy rate by 50 basis points next week to the upper end of its estimated neutral range (2.25% to 3.25%),” he said.
TD’s Andrew Foran felt that 25bps was the likely outcome following the GDP data and his colleague Maria Solovieva says that this still may be the route the BoC takes if it prioritizes the risk from tariffs, fiscal spending, consumer spending, and real estate. But the jobs report and broader economic weakness could take centre stage and prompt a 50bps cut.
Michael Davenport, economist at Oxford Economics Canada, told CTV News that: "With slack continuing to build in the labour market, GDP growing at a soft below-potential pace, and inflation at the 2% target we expect the Bank of Canada will push ahead with another 50bp rate cut next week,"
Not a reason to cut
Meanwhile, Derek Holt at Scotiabank remains critical of BoC policy and, while he expects the decision makers to make a 50bps cut on Wednesday, he does not think the jobs report is a reason to do so with 50,000 jobs added “nothing to spit at.”
Holt says that the two reasons why the BoC may cut by 50bps are, firstly, risk management in line with concerns about not cutting enough to prevent inflation falling too far; and secondly, because the markets expect it.
“Markets are pricing almost all of a half point cut in the wake of this morning’s numbers. So give it to them and blow a party favour. Put on the Santa Clause costume for the presser as a nice added touch,” he wrote in his analysis.
