Bank of Canada Expected to Accelerate Monetary Policy Easing Amid Weak Economic Growth and Inflation Risks

Strategic Insights -

The Bank of Canada is anticipated to undertake a significant interest-rate reduction, potentially by half a percentage point, to a 3.75% policy rate, in response to the country's sluggish economic growth and concerns that inflation may fall below the central bank's 2% target. This move would mark a significant shift in the bank's monetary policy stance, coming on the heels of three consecutive quarter-point cuts. Experts and analysts suggest that the bank's decision to accelerate its easing cycle is warranted, given the current economic landscape, which includes a sluggish economy, rising unemployment, and a decline in inflation.

Key Takeaways:

  • The Bank of Canada is widely expected to lower its policy interest rate by half a percentage point to 3.75% on Wednesday, in response to weak economic growth and concerns that inflation could get stuck below the central bank's target.
  • The annual rate of inflation hit the central bank's 2% target in August for the first time since 2021, but has since fallen to 1.6% in September, raising concerns about a potential recession.
  • Canada's economic growth is sluggish, with unemployment rising sharply and consumers and businesses being downbeat, leading many economists to believe that the current level of interest rates is too restrictive for the current economic cycle.
  • The Bank of Canada's decision to accelerate its easing cycle may put it on a different trajectory from the US Federal Reserve, which kicked off its own easing cycle last month with a half-point cut.
  • The Canadian dollar has weakened against the US currency over the past month, as bond markets have priced in different paths for the Bank of Canada and the Federal Reserve.
  • The Bank of Canada is unlikely to be constrained by a weakening Canadian dollar, according to Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets, who notes that currency moves would only add a fraction of a percentage point to inflation.

Statistics:

  • 19 out of 29 analysts polled by Reuters are betting on a half-point cut in interest rates on Wednesday, with interest-rate swap markets putting the odds of a half-point cut above 90%.
  • The quarterly Monetary Policy Report from July expected GDP to grow at an annualized rate of 2.8% in the third quarter, but the latest Statistics Canada data suggests the actual growth rate is between 1% and 1.5%.
  • Canada's inflation rate has declined particularly fast, reaching a four-decade high in 2022 and falling to 1.6% in September.
  • The Bank of Canada has reduced interest rates by a total of 1.5% since February, bringing the policy rate to 3.5%.

Sources:

  • LSEG data
  • Reuters
  • Bank of Canada's Monetary Policy Report
  • Statistics Canada data
  • CIBC Capital Markets
  • Pacific Investment Management Co. (PIMCO)