Bay Street economists agree that the Bank of Canada is likely to deliver a 50 basis point rate cut next week, with a risk that it could go even bigger than that. Economists expect the target for the key overnight rate to be set at 1.75%, down from 2.25%.

“The Canadian economy has cooled and inflation is starting to show some indications of moderation. In conjunction with the ongoing deterioration in the U.S, falling commodity prices and the global credit crunch, the Bank of Canada has a strong case to cut rates on December 9,” notes TD Bank.

BMO Capital Markets agrees, adding that the only debate will be over the size of the rate cut. The consensus is for a 50 bps cut, with a significant risk that it could deliver a 75 bps move.

Following today’s weak jobs report, RBC Economics says, “Our forecast is that the unemployment rate will continue to drift higher into next year as weak demand for Canadian exports and slower consumer and business spending lead to more job losses. Today’s data is the one of the final reports before the Bank of Canada’s meeting next week. We expect the Bank to lower the overnight rate by 50 basis points to 1.75% as policymakers try to cushion the economy from the impact of these downward pressures.”

BMO says, “With central banks around the world dramatically cranking up the easing tempo, including a raft of cuts of 100 bps or more, there is a good chance the Bank of Canada will also step up the pace. Governor Carney suggested in his November 19 speech that the downside risks had risen markedly, just since the Bank’s Monetary Policy Report was released less than a month earlier.” It also expects a 50 bps cut, double the move in October, taking the overnight rate to 1.75% (and the Bank Rate to 2%, its lowest level since 1960). “There is a greater chance of an even bigger cut, rather than a more modest trim,” it adds.

CIBC World Markets says that recent comments by Bank of Canada governor Mark Carney “suggest to us that the Bank will move by 50 bps, and considering the benign inflation outlook and the worsening economic conditions we expect an additional quarter-point cut early next year as well.”

While the banks’ economists agree that a 50 bps move is most likely, TD reports that money markets have priced in a 40% chance of a 75 bps cut. “Indeed, it would not be inconceivable that the Bank cuts by 75 basis points. Certainly, given the size of recent G10 central bank rate cuts of 100 basis points or more, it is not unheard of to aggressively cut rates.”

“But we assign a smaller probability to this outcome than the market does, in part because the Bank is a bit more ahead of the game than other central banks, having started their easing cycle last December, and in part because the Bank of Canada consciously cut by just 25 basis points at its last scheduled decision, which frustrated market expectations,” it says.

TD also notes that the accompanying communiqué is likely to be “fairly dovish and should fuel further rate cut expectations which are already partially priced into the futures market”.

IE