The Bank of Canada is set to announce Wednesday morning whether it’s speeding up its interest rate cuts in an attempt to kick-start the economy.
Most economists and traders expect the Bank to announce it’s cutting its key overnight interest rate by 50 basis points — a half percentage point. That would bring the overnight rate to 3.75 per cent. Trading on the overnight interest swap market has priced in a 90 per cent chance of a 50-basis-point cut, and a slight chance of a 75- or 25-basis-point cut.
The Bank has already cut the overnight rate by 25 basis points three straight times, from a high of five per cent.
The Bank raised rates 10 times between March 2022 and last summer in a bid to wrestle inflation down to its two per cent target. Inflation peaked at 8.1 per cent in June 2022 as the Canadian economy opened back up from COVID-related restrictions.
The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving down prices and slowing the economy.
Now, as the economy slows and inflation has been heading mostly downward, the Bank is taking the reverse approach, trying to stimulate growth by cutting rates. In September, Canada’s annual rate of inflation fell to 1.6 per cent, from two per cent the previous month.
The softening in the economy — including annualized Gross Domestic Product growth of 2.1 per cent in the second quarter — is unquestionably a concern for the Bank, said Nathan Janzen, assistant chief economist at RBC.
“Policymakers look increasingly worried that the current high level of interest rates is causing more economic pain than is necessary,” said Janzen, who expects a 50-basis-point cut Wednesday and another 50-basis-point cut in December — and even more cuts next year.
The Bank will also unveil its latest Monetary Policy Report — a quarterly look at the Canadian and global economies.
More to come.
