Two cuts in a row? You can probably take it to the bank.
The Bank of Canada is almost certainly set to cut its key overnight lending rate for the second straight time Wednesday, market watchers and economists say.
The biggest reason? A weaker than expected economy, including a rapidly rising unemployment rate.
Trading in the overnight interest swap market has priced in a more than 90 per cent chance of the bank lowering its key rate by a quarter of a percentage point, to 4.5 per cent from 4.75 per cent, Wednesday morning.
In a research note, RBC economists Nathan Janzen and Carrie Freestone point out that the unemployment rate has risen by 1.6 percentage points since the depths of the global COVID-19 pandemic, hitting 6.4 per cent in June.
“Since the 1970s, Canada has never had a trough-to-peak increase in the unemployment rate of that size without the economy going through a recession,” Janzen and Freestone wrote.
That’s one of the reasons, they argue, that the Bank of Canada is likely to follow up its June rate cut with another one this time around.
“The BoC’s easing cycle is underway. … We expect three additional back-to-back cuts in subsequent meetings will bring the overnight rate to four per cent by year end,” Janzen and Freestone wrote.
The Bank of Canada makes eight interest rate decisions a year. After Wednesday, there are three more left in 2024, including in September, October and December.
On June 5, the bank cut the overnight rate by a quarter percentage point to 4.75 per cent, the first time it had dropped below five per cent since last July, and the first time in more than four years it had made any cut at all.
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 interest rates.
Other factors pushing in that direction, argues Scotiabank economist Derek Holt, aside from purely economic reasons: history, and saving face.
“If the Bank of Canada does not cut on Wednesday, then this would tighten financial conditions and serve as a confidence-sapping admission that they shouldn’t have started to ease in June,” wrote Holt, who pointed out that in five of the last six “easing” cycles, the Bank of Canada cut rates twice in a row at the start.
Holt also suggested that inflation hasn’t been wrestled to the ground just yet.
“It is premature to assume that inflation has been conquered,” Holt wrote.
TD economist Leslie Preston called a rise in “core” inflation — a measure meant to be less volatile than the main headline rate — a potential fly in the ointment for the Bank of Canada.
“If the Bank of Canada opts to surprise markets next week and take a pause on rate cuts, this will likely be the reason that they cite,” Preston wrote. “It will come down to how much weight the Bank of Canada puts on this particular fly.”
Still, she added, since the bank’s last monetary policy report in April — a broad, quarterly look at the Canadian and global economy — the bigger picture is of a Canadian economy that is weakening.
“Inflation has fallen slightly faster than the bank had expected, and growth has been weaker,” Preston wrote.
