Bank of Canada Expected to Lower Interest Rate Amid Economic Uncertainty

Strategic Insights -

Economists and markets predict the Bank of Canada will lower the policy interest rate by 25 basis points next Wednesday, despite inflation ticking up last month, as the unemployment rate remains too high and companies continue to hold back spending amid tariffs and economic uncertainty. The Canadian automotive industry and other tariff-sensitive sectors have been hit hardest by the trade war, with Stellantis announcing it is moving 3,000 auto jobs from Brampton to the U.S. The rate cut, if confirmed, would bring the policy rate to 2.25 per cent from the current 2.5 per cent.

Key Takeaways:

  • The unemployment rate remains too high for comfort, with the jobless rate unchanged at 7.1 per cent in September, while the economy gained 60,000 jobs.
  • Companies continue to hold back spending amid tariffs and economic uncertainty, as shown by the central bank's latest Business Outlook Survey.
  • The Canadian automotive industry and other tariff-sensitive sectors have been hit hardest by the trade war, with Stellantis moving 3,000 auto jobs from Brampton to the U.S.
  • RBC economists wrote in a note to clients that they think it's unlikely the Bank of Canada expected the one 25-basis-point cut in September would be enough to make a significant difference in the economy.
  • TD chief economist Beata Caranci said there is a possibility the central bank will hold interest rates and take a wait-and-see approach ahead of the budget, though the probability of that happening is low.
  • Desjardins economist Royce Mendes is expecting the Bank of Canada to cut by 25 basis points on Wednesday and will be watching the tone of the bank's communications closely.

Statistics:

  • Inflation unexpectedly jumped from 1.9 per cent to 2.4 per cent last month.
  • Investment in money markets is predicting an 82 per cent chance of a 25-basis-point cut.
  • The policy rate is expected to be lowered to 2.25 per cent from the current 2.5 per cent.
  • The federal budget will be tabled on November 4, with the feds expected to deliver a significant amount of fiscal stimulus to the economy, which could trigger inflation.
  • There is a possibility of 40,000 job losses this year, according to TD chief economist Beata Caranci.

Sources:

  • The Star, economists surveyed by the paper.
  • London Stock Exchange Group, data supplied to the Star.
  • RBC economists, note to clients.
  • TD chief economist Beata Caranci, interview with the Star.
  • Desjardins economist Royce Mendes, interview with the Star.
  • Bank of Canada, Business Outlook Survey.
  • Statistics Canada, unemployment rate and job gains data.