Bank of Canada could go bigger on interest rate cuts

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The United States Federal Reserve made a big splash with Wednesday’s 50-basis-point interest rate cut, prompting some Canadian economists to believe the Bank of Canada could match the move when policymakers meet at the end of October.

So far, Bank of Canada officials have cut interest rates three times by increments of 25 basis points since the beginning of June, leaving its benchmark policy rate at 4.25 per cent.

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Following the most recent cut on Sept. 4, some economists said the bank was being too cautious and needed to move faster to get rates into a zone where they are no longer suppressing economic activity.

Economists at CIBC Capital Markets and National Bank of Canada said a larger cut would be “defensible” and “appropriate in our view given the balance of risks in the labour market and on the growth outlook” following the September rate announcement.

Post-Fed, economists think chair Jerome Powell has opened the door wider for Bank of Canada governor Tiff Macklem to make bigger cuts.

“There could be a jumbo cut and the Fed gives (the Bank of Canada) more room because it puts less pressure on the dollar,” Tony Stillo, director of Canada Economics at Oxford Economics, said during a webinar on the state of the Canadian economy.

There were concerns that the Canadian dollar would suffer against its U.S. counterpart as Macklem and his officials began cutting before the Fed, thereby putting the loonie at a disadvantage when it came to interest rate differentials.

Charles St-Arnaud, chief economist at credit union Alberta Central, thinks the Fed’s half-point cut “reduces the hurdle for the BoC to do 50 basis points in October.”

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But perhaps more significantly, Macklem said during an interview with the Financial Times that “it could be appropriate to move faster (on) interest rates.”

His words suggest two things, St-Arnaud said in an email: “The door is wide open to a 50-basis-point cut and the hurdle to make a bigger cut is as high as we thought, and that the BoC could be considering bringing its policy rates towards neutral faster than I expected.”

Powell’s jumbo cut “blows the door wide open for the Bank of Canada to do the same in October,” Royce Mendes, managing director and head of macro strategy at Desjardins Securities, said in an email.

He said a bigger cut could make the difference between a soft landing and a recession.

Canada’s economy is at a crossroads, with economists expecting annualized growth in the third quarter to come in at 0.5 per cent, well below the Bank of Canada’s current target of 2.8 per cent.

Labour markets are also failing to produce enough jobs to keep pace with a rising population. With more people looking for work, the unemployment rate has risen to 6.6 per cent, up 1.8 percentage points from its cycle low of 4.8 per cent in July 2022.

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Tu Nguyen, an economist at tax consulting firm RSM Canada LLP, thinks the Bank of Canada’s focus should shift to the labour market, as has happened at the Fed.
“The Bank of Canada has been cautious thus far, opting to cut the policy rate by only 25 basis points at each meeting to avoid reigniting inflation and shooting up housing prices,” she said in an email.

But the latest inflation numbers show that particular dragon has been slayed, as the headline number slowed to the Bank of Canada’s target of two per cent, meaning “the risk has clearly shifted from high inflation to a weak job market,” she said.

The U.S. economy is on much more solid footing than Canada’s, with the latter suffering from rising unemployment and weak business investment, Nguyen said.
“The Fed’s decision gives a signal that bigger-sized cuts might be needed to enable recovery,” she said.

However, Stillo and St-Arnaud don’t necessarily think bigger rate cuts will add up to an overall lower terminal rate.

Stillo is forecasting the endpoint for this cycle of cuts will be 2.25 per cent, which would be “modestly stimulative” for the economy.

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Bharat Masrani will retire as the chief executive of the Toronto-Dominion Bank in April next year after spending more than a decade in the post, the bank said on Thursday.

TD’s board of directors has chosen Raymond Chun, group head of the bank’s Canadian personal banking unit, as his successor. As part of the succession plan, Chun will be appointed as chief operating officer effective Nov. 1 and will report to Masrani until April. At that point, Masrani will take on an advisory role until November.

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• Today’s data: Statistics Canada releases retail sales for July
• Earnings: Quebec Precious Metals Corp., Taeko Minerals Corp., Asbestos Corp. Ltd., Masonite International Corp.