The Bank of Canada’s decision to chop its key interest rate by another 50 basis points “misses the forest for the trees,” according to James Orlando, director and senior economist with TD Economics.
Among the data points driving the decision was last week’s announcement by Statistics Canada that the national unemployment rate rose to 6.8% in November, a high not seen since the Covid-19 pandemic.
In a note to investors, Orlando wrote that hiring has turned around.
“The rise in the unemployment rate is missing the fact that hiring has reaccelerated over the last few months, while underlying growth momentum has been robust with consumer spending driving fundamental demand,” wrote Orlando. “Not to mention, the real estate market has caught fire once again.”
In an interview, Orlando said time will determine whether or not this latest cut was too aggressive.
“I don’t think they needed to go by 50,” he said. “You look at job growth, averaging 30,000 jobs a month for all of this year and accelerating right now. You look at what we call final domestic demand — actual demand for stuff in Canada, which is a measure of underlying economic performance — that’s been above trend for the entirety of 2024. And you look at the real estate market starting to accelerate after the bank, in October, cut by 50 basis points.”
The latest jumbo cut puts the Bank of Canada in its neutral range of 2.25%–3.25%. That’s believed to be the point at which the overnight rate no longer has a significant impact on economic growth, although Orlando said that’s never entirely knowable. This is the central bank’s fifth consecutive rate cut.
“They were in a little bit of a rush to get into this — what they call the neutral range,” Orlando said.
Douglas Porter, chief economist and managing director with BMO Capital Markets, pointed out in his own note to investors that this latest move makes the Bank of Canada the “most aggressive rate-cutter in the world.”
“[N]o other G10 central bank has cut by more than 125 bps, and the Fed is at 75 bps so far,” Porter wrote.
The Bank of Canada has cut a total of 175 basis points in the current cycle, to now sit at 3.25%.
Governor Tiff Macklem said that in the near term, “we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.”