GDP data is the latest indicator that Canada's central bank can continue easing
The Bank of Canada will be making another decision on interest rates on Wednesday, and there is speculation that it will opt to cut by 50 basis points, accelerating its policy easing from the 25bps cut in July.
Speaking to CTV News, Concordia University economics professor Moshe Lander said the question is the size of September’s cut rather than whether there will be one.
“There’s no question that there’s a cut coming,” he said, adding that whether the cut is 25bps or 50bps the economy will react favourably to the “return to business as usual” with inflation returning to the 1-3% target range coveted by the BoC.
Asked about the reason for the speculation about the size of the next rate cut, Lander highlighted the lag between changes to rates and the impact it has – and previous comments from the BoC that inflation could fall towards the lower end of its target rate, allowing policymakers to cut more aggressively to boost the softer economy without worrying too much about upward inflationary pressure.
Meanwhile, a poll of 18 economists by Bloomberg unanimously rejected that a 50bps cut would happen this week or at any time during the current rate-cutting cycle. They do expect rate cuts though, of 25bps each time, with five such cuts extending into 2025 and beginning September 4. Citibank economists are among those suggesting a potential 50bps cut, in October, but they did not participate in the poll.
The Bloomberg survey also shows widespread expectation that inflation will be around 2% by the middle of 2025 in line with a softening Canadian economy, but half of respondents think the BoC will start hiking rates again in the second half of 2026.
Big banks reaction
A quick snapshot of Canada’s big bank economists in light of the latest GDP data which was released last Friday:
“We continue to expect the BoC to follow up cuts to the overnight rate by another 25 bps in September.” – Abbey Xu, RBC.
“The BoC will take this overall [GDP] report as justification for a widely expected quarter-point cut next Wednesday and ongoing dovish bias that defers to the October decision with its full forecast update.” – Derek Holt, Scotiabank.
“The Bank of Canada is likely to interpret [last week’s GDP] data as supportive of maintaining its easing bias, with three more quarter-point cuts expected by year-end.” - Maria Solovieva, TD.
“We saw no hints that a 50bps move was actively considered at the last meeting, and having to move ahead of the jobs figures will likely hold them to another 25bps reduction.” – Avery Shenfeld, CIBC.
