Experts anticipate a 50-basis point rate cut as concerns grow over slower growth and austerity measures
The Bank of Canada is expected to announce a 50-basis point rate cut on Wednesday, as economists and markets anticipate a drop in the central bank’s key policy rate to 3.75 percent, according to Bloomberg News.
Jim Thorne, chief market strategist at Wellington-Altus Private Wealth, also foresees a 50-basis point cut. However, he noted that a 75-basis point reduction could “freak people out.”
Thorne highlighted that much of the country’s second-quarter GDP growth was driven by government spending.
Thorne explained that the Bank of Canada is currently below its target, stating, “the natural rate of interest is about 2.75 (percent). They should be below 2.75 right now. Whether they go 75 (basis points), 50 or 25, we’re not going to feel the effect of those rate cuts until April of 2026.”
He believes the Bank has been slow in lowering borrowing costs amid a broader contraction in the private sector.
Thorne expects economic growth to slow down in 2024, accompanied by potential austerity measures in both Canada and the US.
“I would suggest that we can no longer sustain the government spending that we are doing right now, and we are going to have a pullback. And what was a tailwind for economic growth will be a headwind for economic growth,” he said.
He added that political changes, particularly in the US, could initiate a shift in spending, which may also impact Canada.
While Thorne doubts the current government in Canada will reduce spending, he predicted that if Pierre Poilievre were to become prime minister, significant cuts to government spending would likely follow.
“I think it will start with the election in the United States, and it will eventually filter unfortunately into Canada. I don’t think the Trudeau government is willing to pull back. But I think if the polls are correct and Poilievre gets in, we’re going to see substantial cutbacks in government spending in this country,” Thorne remarked.
David Doyle, head of economics at Macquarie Group, shared his insights in an interview with BNN Bloomberg, suggesting that September’s inflation data may provide the Bank of Canada with the “green light” to proceed with a 50-basis point cut.
Doyle explained that the Bank’s aggressive rate cutting would offset the tightening impact of earlier rate hikes from 2021 and 2022.
Geoff Phipps, trading strategist and portfolio manager at Picton Mahoney Asset Management, commented to BNN Bloomberg that recent economic data suggests the “policy risks from the Bank of Canada have skewed toward not being accommodative enough.”
Phipps anticipates that the Bank may need to introduce multiple 50-basis point cuts to bring the overnight rate down to a neutral range, potentially between mid to high two percent or even lower.
