By Max Sato
(MaceNews) – The Bank of Canada is widely expected to slash its policy interest rate – the target for overnight lending rates – by yet another large-sized 50 basis points to 3.25% on Wednesday to safeguard the economy from the chilling effects of its own 17-month rate hike campaign through mid-2023 aimed at taming inflation.
The bank is likely to indicate clearly that it will leave the door open for further rate cuts in light of a jump in the unemployment rate and in the face of a resumed trade friction with the United States.
Friday’s November jobs data showed that a jump in population led the unemployment rate to surge three ticks to 6.8%, taking the rate a full point above year-ago levels.
Until recently, many economists had predicted that the bank would continue cutting interest rates, by 25 basis points at each meeting, to bring the policy rate eventually to around 2.50%, which is considered neutral to economic activity, possibly by June next year. The BoC’s next rate announcements are scheduled for Jan. 29, March 12, April 16 and June 4.
But BMO Financial Group Chief Economist Douglas Porter warned that the 25% tariff threat by U.S. President-elect Donald Trump, if fully implemented with only limited retaliation from Ottawa, could push down Canada’s economic growth in 2025 by roughly a full percentage point from BMO’s forecast of 2.0%.
That would prompt Canada’s central bank to lower the overnight rate to 1.50%, compared to an eventual drop to 2.50% under the BMO’s standard scenario, producing a cumulative 350 basis points (3.5 percentage points) of rate relief within a year from June 2024 when the bank began cutting rates, Porter said.
Trump has said he would impose a 25% tariff on all goods from Mexico and Canada as soon as he takes office on Jan. 20, and that he would also slap an additional 10% tariff on imports from China, all part of his drive to crack down on illegal drugs and immigration. About 75% of Canadian exports go the United States, with oil and gas and vehicles and parts topping the list of goods.
As the BoC appears to be more aggressive in easing credit than its U.S. counterpart, the Canadian dollar remains weak against the dollar, which could push up import costs and consumer prices. Inflation has come down significantly from 2.7% in June to 1.6% in September before climbing back up to 2.0% in October, which is consider to be a blip in its general downtrend.
“It seems that the BoC really is not that concerned about a weak CAD, and believes that there is not that much inflation risk from a somewhat softer currency,” Porter said.
Bank of Canada policymakers “would be focused on the help that lower interest rates would provide to the economy,” he said. “I believe their concern is that with the unemployment rate at 6.8% and apparently rising, there is already plenty of slack in the economy.”
Avery Shenfeld, chief economist at CIBC Capital Markets, also predicted that the bank “could find itself needing to be even more aggressive.”
“The threat of U.S. tariffs will already weigh on business capital spending here while we wait to find out if they are actually imposed,” he wrote in a report. “If Trump follows through, the dent to Canada’s exports would necessitate even further monetary policy easing to support domestic demand.”
At its June 2024 meeting, the bank conducted its first interest rate cut since March 2020 but also left monetary policy “restrictive” to economic activity. The action was different in nature from three emergency rate reductions, resulting in a reduction from 1.75% to 0.25%, at the early phase of the pandemic when demand plunged across the world.
In October this year, the bank lowered its policy rate by 50 basis points to 3.75%, as widely expected, to help ease the pain of its earlier rapid credit tightening on households and businesses after conducting three 25-basis point cuts.
The bank is in the process of gradually unwinding the 10 rate hikes totaling 475 basis points that it conducted between March 2022 and July 2023, taking the overnight rate to a 22-year high of 5% from its record low of 0.25%.