By Promit Mukherjee
OTTAWA (Reuters) – The Bank of Canada is widely expected to trim its key overnight rate by another 25 basis points on Wednesday, economists said, as rising unemployment and uninspiring economic growth give it no reason to diverge from its rate cutting cycle.
The central bank has lowered its key policy rate by 50 basis points in total at its last two meetings, becoming the first central bank among G7 countries to cut borrowing costs. Another similar cut would bring the interest rate down to 4.25%.
Canada’s annual inflation rate cooled to a 40-month low of 2.5% in July, making it the seventh month in a row that consumer prices have stayed within the central bank’s 1% to 3% target range, building the case for rate cuts.
“The battle (on inflation) isn’t fully won yet, but their focus can now afford to shift somewhat towards supporting growth,” said David Doyle, managing director and head of economics at Macquarie Group.
The BoC might also lay out the path for future rate cuts for the rest of the year, Doyle said.
All 28 economists in a Reuters poll earlier this week predicted the BoC would reduce its key rate again by 25 bps, with around 70% seeing further reductions in October and December.
The poll mirrors financial market expectations, which also forecast three more rate cuts this year.
Canada has diverged from the U.S. in lowering borrowing costs, but financial markets now see a rate cut from the Federal Reserve in September. The European Central Bank, which followed the BoC in cutting rates in June, had held off since but economists have called for it to cut in September.
At his last rates decision announcement in July, BoC Governor Tiff Macklem hinted at making a shift in monetary policy to boosting the economy instead of suppressing inflation.
Canada’s economy grew by 2.1% annualized in the second quarter, but monthly figures showed GDP was unchanged in June and likely to be flat in July.
“When you dig in a little bit, you see this isn’t quite good,” Dawn Desjardins, chief economist at Deloitte Canada said of the GDP figures.
However, she said the economy was still not in a dire position that could warrant a jumbo 50 basis point cut.
Rising unemployment and looming mortgage renewals next year also make the case for rates to continue to fall, economists have said.
($1 = 1.3497 Canadian dollars)
(Reporting by Promit Mukherjee; editing by Jonathan Oatis)