Five out of six major banks now predict a 50 basis-point cut, while TD remains uncertain about the central bank's move
Five of Canada’s six largest banks now anticipate that the Bank of Canada will lower borrowing costs by 50 basis points, according to BNN Bloomberg.
This follows inflation data that showed a greater-than-expected cooling in the previous month.
TD Bank stands as the only major lender to view the chances of either a 25 or 50 basis point cut as evenly split. This follows a report showing inflation dropped below the Bank of Canada’s 2 percent target for the first time in over three years.
Bank of Nova Scotia, Bank of Montreal, and National Bank of Canada have joined Royal Bank of Canada and Canadian Imperial Bank of Commerce in revising their predictions from a 25 basis-point reduction to a 50 basis-point cut for the upcoming October 23 decision.
This shift highlights the growing belief that a gradual easing of rates may not be sufficient to prevent inflation from falling below target, as Canada's economy continues to show signs of weakening.
A majority of traders in overnight swaps have also increased their expectations that the Bank of Canada will speed up the rate cuts after reducing rates by 25 basis points at each of the last three meetings. The current benchmark overnight rate stands at 4.25 percent.
Last month, Bank of Canada Governor Tiff Macklem indicated that the central bank could cut rates faster if inflation and economic conditions deteriorated more than expected.
Evidence now suggests this may already be the case. Inflation averaged 2 percent on a yearly basis in the third quarter, below the Bank’s July forecast of 2.3 percent, while economic growth has also been weaker than anticipated.
Despite a slight dip in the unemployment rate to 6.5 percent in September, Canada's labour market has significantly weakened over the past year, with population growth outpacing job creation.
Paul Beaudry, former deputy governor of the Bank of Canada, recently suggested that a larger-than-expected cut could occur in October, noting that the conditions for a rapid adjustment of monetary policy were in place.
Citigroup Inc. had already predicted a 50 basis-point cut from the central bank in October, with economists Veronica Clark and Gisela Hoxha making the forecast in an August note.
Still, Bank of Canada officials have largely refrained from signalling an accelerated pace of rate cuts.
Following the inflation report in August, Senior Deputy Governor Carolyn Rogers stated that while headline inflation had reached the 2 percent target, more progress was needed on core inflation, which remained at 2.35 percent in September.
The last time the Bank of Canada reduced interest rates by more than 25 basis points was during the pandemic, when former Governor Stephen Poloz lowered the overnight rate to 0.25 percent, the emergency lower bound.
