The Bank of Canada surprised on the upside with its 75 basis point rate cut Tuesday, and economists are split on where it goes next.

For the most part, economists were calling for a 50 bps rate reduction, although some allowed for the possibility that it could deliver a 75 bps move.

“The Bank highlighted that the global economic backdrop “has deteriorated significantly” and that financial markets “remain severely strained”. The Bank also acknowledged that Canada’s economy “is now entering a recession” and that the core inflation rate is likely to be lower than policymakers expected in October,” observes RBC Economics.

National Bank Financial says that this morning’s decision was the right call. “With the unfolding global recession, it was imperative that the central bank provide an environment of negative real interest rates. By cutting its target for the overnight rate by 75 basis points to 1.50%, the Bank of Canada is providing such an environment for the first time since 2002,” it says. “This was all the more important since the BoC is now acknowledging that the Canadian economy is entering a recession due to a series of negative shocks: negative wealth effect from job losses, the falling stock market, and from collapsing terms of trade caused by the plunge in commodity prices.”

Looking ahead, economists agree that the Bank is leaving the door open to further cuts, but they are hardly unanimous on whether more cuts are coming and how far the Bank may yet go. “Though the central bank remains on the watch about the need for further interest rate easing, we would argue that further actions will have to be calibrated in order to take into account the potentially large fiscal stimulus packages that will be unveiled on both side of the border in January,” NBF says.

“Though today’s rate cut might not be the last one, we believe that the heavy lifting is about to shift from monetary policy tools to fiscal policy. Should politicians deliver fiscal stimulus packages that are significant in size, we would expect only a modest further rate easing in Canada (25 basis points),” NBF concludes.

RBC says the tone of today’s policy statement “hints of some confidence that the accommodative level of monetary policy and liquidity provisions will be sufficient for the Canada’s economy to emerge from the current economic slowdown.”

It concludes that the message from the Bank today is that it will hold the overnight rate at 1.50%, however, it concedes, “should these factors prove insufficient and a more protracted downturn ensues, further interest rate cuts cannot be ruled out in the months ahead.”

TD Economics notes that with the overnight rate at 1.5%, the Bank’s scope for further dramatic cuts is increasingly limited. “Nonetheless, Canada is only just entering a recession that will likely get worse before it gets better. Given the further deterioration in the outlook for inflation, an additional 50 basis point cut when the Bank of Canada meets again on January 20th is a reasonable expectation,” it concludes.