The Bank of Canada is set to make a major announcement on its overnight interest rate tomorrow, and most economists are predicting a significant cut. While a 50-basis-point reduction is the most likely outcome, some experts suggest that an even bigger cut—75 basis points—could be on the table.
Could We See a 75-Basis-Point Cut?
Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce (CIBC), believes the Bank of Canada may opt for a larger-than-expected rate cut. In a note to investors, Shenfeld said that although the central bank typically adjusts rates by 25 or 50 basis points, a 75-point cut is not out of the question. He noted that many economists are already expecting a total cut of 75 basis points by December, so the bank may decide to front-load the reduction and make that move tomorrow.
“If a 3.5% or lower overnight rate is appropriate for a few months from now, why not get there sooner to see its effects faster?” Shenfeld said. He compared this potential move to the Bank of Canada’s aggressive rate hikes last year, when it raised rates by 100 basis points in a single step to curb inflation.
A Shift in Focus: From Inflation Control to Economic Growth
With inflation now sitting at 1.6%, well below the Bank of Canada’s 2% target, the focus has shifted toward reviving economic growth. The recent drop in inflation was largely driven by falling gas prices, and economists like Claire Fan from RBC argue that inflation is likely to slow further.
The Canadian economy has been weaker than expected. While the Bank of Canada originally forecasted 2.1% GDP growth for the third quarter, early estimates suggest the number could be closer to 1%. TD Bank’s chief economist, Beata Caranci, remains in the minority, advocating for a smaller 25-basis-point cut. She argues that there’s no urgent need for an “emergency-style” cut, but she acknowledges that most of her peers are now betting on a 50-basis-point reduction.
What Does This Mean for Canadians?
If the Bank of Canada opts for a larger cut, consumers could benefit from lower borrowing costs on mortgages, loans, and credit cards. However, a steeper cut could weaken the Canadian dollar (loonie), as a faster rate reduction than expected isn’t priced into the foreign exchange market yet.
Shenfeld warns that while a softer Canadian dollar could boost exports and prevent inflation from falling too much, it also adds volatility to foreign exchange markets, making it harder for the central bank to manage economic conditions.
Looking Ahead: More Rate Cuts?
Many economists believe this won’t be the last rate cut. Some, like National Bank’s Taylor Schleich and Warren Lovely, are expecting another 50-basis-point cut at the Bank of Canada’s December meeting. Meanwhile, Douglas Porter from BMO predicts that after this week’s cut, the central bank will follow up with a series of smaller 25-point cuts, ultimately bringing the rate down to 2.5% by early 2025.
With the Bank of Canada’s decision looming, all eyes are on whether the central bank will deliver the widely expected 50-basis-point cut—or go bigger with a 75-point drop.
Sources:
How deep will Bank of Canada cut overnight rate on Oct. 23? – Bowen Island Undercurrent
Bank of Canada expected to make jumbo rate cut on Oct. 23 | Financial Post
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