By Mumal Rathore and Pranoy Krishna
(Reuters) – The Bank of Canada will slash interest rates by a half percentage point at a second consecutive meeting on Dec. 11, according to a majority of economists polled by Reuters, many of whom changed their view on news of a sharp rise in unemployment.
The BoC is already well in front of its peers for both size of rate cuts and speed. It has reduced rates by 125 bps, nearly double that of its southern neighbour, the U.S. Federal Reserve, which has hammered the Canadian dollar.
News on Friday Canada’s jobless rate spiked to an 8-year high – outside the pandemic period – of 6.8% made several forecasters change their call to 50 bps from 25 bps. That rise came despite news over twice the number of jobs expected were added to Canadian payrolls in November.
Nearly 80% of respondents, 21 of 27, predicted the Bank to cut the overnight rate by 50 bps on Dec. 11 to 3.25%. The rest forecast a quarter-point reduction.
While interest rate futures traders had been pricing in the larger move, economists argue the decision is still nuanced. Some who switched to 50 said this did not mean they thought this was the correct policy choice.
Derek Holt at Scotiabank was one of several who changed to 50 bps on Friday.
“I hate the call because I think it’s the wrong thing to do, but they are likely to take the easy way out relative to market pricing while arguing that the risk of doing too much is less than the risk of doing too little that could see inflation undershoot,” said Holt.
“I hope that (BoC Governor Tiff) Macklem will sound more circumspect and cautious if he does go big as multiple arguments lean toward being very cautious on inflation into 2025.”
Inflation rose to the 2.0% central bank target in October, the first rise in the annual rate since May, but that was in line with the BoC’s recent predictions. Signs of improvement in parts of the economy suggest there is a risk it rises further.
Among the big five Canadian banks, only TD expects 25 bps.
James Orlando, senior economist at TD, noted that when the BoC stepped up its rate-cutting pace to 50 bps in October, there were concerns at the time that it was behind the curve with both growth and inflation undercutting expectations.
“But since then, economic data have shown more resilience, with consumer spending, the real estate market, and price pressures rebounding,” Orlando wrote.
“Even with the messiness of (the) employment report, the economy continues to add jobs, reinforcing our view that the labour market is on solid foundations. We think this should be enough to convince the central bank to revert to a 25 bp cut next week, but it will remain a close call,” he noted.