MNI BOC WATCH: Slack Pushing Macklem To Second 50BP Rate Cut
MNI (OTTAWA) - The BOC will lower rates for a fifth meeting to keep inflation from undershooting in a weak economic recovery, with investors leaning towards a repeat of October’s half-point move instead of a return to quarter-points cuts earlier this year.
Twelve economists surveyed by MNI see the 3.75% overnight rate falling to 3.25% in a decision due Wednesday at 945EST, ahead of the six calling for a smaller move.
Governor Tiff Macklem has said multiple cuts can be justified with inflation settling back on target, and decisions will be guided by the pace of the rebound and lingering inflation pressures. While this decision has split economists, they see the rate ending up around 2.5% by the middle of next year, the lower half of the Bank’s neutral range.
Instead of above-potential growth officials say is needed to use up modest slack and keep inflation at the 2% target, GDP lagged the Bank’s projections in Q2 and Q3. Friday's job report also continued the pattern of labor force growth outstripping job creation and lifting unemployment. Inflation did quicken last month to 2% from 1.6% but officials said that was in line with forecasts, and the main driver was a gasoline base effect.
MORTGAGES AND OTHER TARIFFS
“The weakening labour market, combined with still-sluggish trend in GDP, also supports our assumption that interest rates will need to drop below a neutral level next year" including 50bps Wednesday, CIBC’s Andrew Grantham said in a note.
Macklem is also undeterred by opening up the biggest gap with the Fed in decades and CAD weakness. The gap has been a full percentage point this year and a fresh 50bp cut would take the difference to 125bps, still half of a 1997 peak.
Weaker CAD is to be expected through a period of stronger U.S. growth fueled by deficits. Canada lags further after accounting for record immigration that dragged down per-person output. Experts tell MNI that amounts to a hidden recession rather than a soft landing. (See: MNI INTERVIEW: BOC Primed For Another Jumbo Cut- Ed Devlin)
Consumers are at further risk with many borrowers' five-year mortgages resetting at costs that reflect most of the Bank's prior hikes to 5% from near zero. That makes rising unemployment more of a danger, and consumption is already seen as the key risk to the official forecast.
STICK THE LANDING
Even if unmentioned in the decision, Canada faces new geopolitical shadows. U.S. President-Elect Donald Trump is threatening a 25% tariff next month on Canadian exports, and PM Justin Trudeau could introduce a major budget deficit as he seeks to catch up in the polls before opposition parties force an election. (See: MNI INTERVIEW: BOC Faces Recessionary Risk On Tariff Hit: Lane)
Inflation hotspots linger such as housing and wages growing 4% at a time when officials call that out of line with stagnant productivity. Core inflation also remains slightly above 2%.
Economists at BMO and Alberta Central say their jumbo cut forecasts come without full confidence, and with reason. BOC minutes suggested officials have been divided on inflation's path, and their decisions bucked consensus five times coming out of the pandemic.
While the Bank has led the G7 on cuts this year, outsized moves remain unusual. Since the fixed announcement system began in 2000, the Bank hasn’t made multiple 50bp reductions outside of the pandemic, the global financial crisis or 2001 terrorist attacks.
Quite a bit rests on this comment from Macklem: “Now our focus is to maintain low, stable inflation. We need to stick the landing."