Canada’s largest banks are split on whether investors will see the Bank of Canada cut its target for the overnight rate by 25 or 50 basis points next month. New jobs data landed Friday, providing little clarity on the subject. The country’s unemployment rate was 6.5% in October, unchanged relative to the previous month.
The economy added fewer than 15,000 jobs in October, a figure that Douglas Porter, chief economist and managing director with BMO Capital Markets, said is below average for this year.
“We actually need something closer to 50,000,” he said in an interview with Investment Executive. “The underlying population is growing a lot faster than that in a typical month.”
Canada took in 134,138 immigrants in the second quarter of this year, according to Statistics Canada.
Porter said “the lingering effects of high inflation and high interest rates” are to blame for the country’s stubbornly slow economic growth.
“We are starting to see some encouraging signs, just in recent weeks,” he said. “On a purely domestic basis, there are some grounds for optimism that growth will improve over the next year.”
BMO has forecast a 25-basis point overnight rate reduction by the Bank of Canada next month. “We’re certainly open to the possibility that they might deliver another aggressive point cut. … We’ve got a full month of economic data to go before the decision is made. It’s a pretty close call.”
One more jobs report is expected before the Bank of Canada makes its Dec. 11 announcement.
“Our forecast is for another 50-basis point reduction in the overnight rate in December on broadening economic slack and a weak labour market,” said Katherine Judge, director and senior economist with CIBC Capital Markets.
CIBC has predicted that the overnight rate will fall to 2.75% by March, and 2.25% by June of next year.
RBC is on the side of a second 50-basis point cut in December. Claire Fan, an economist with the bank, wrote in a note to investors that Canada’s economy has slowed beyond the expectations of investors and the Bank of Canada. Gross domestic product (GDP) growth looks like it will come in at something close to 1% in Q3, against the central bank’s forecast of 2.8% GDP growth.
“In the near-term, we expect the deterioration in labour markets and the broader economy will persist, GDP growth will slow further and the unemployment rate will rise more into early next year,” she wrote.
TD Economics has forecast a 25-basis point cut next month.
“Wage pressure is still there,” said Maria Solovieva, an economist with TD Economics. “We actually see a little bit more resilience in the financial metrics of households, specifically mortgage holders.”
Solovieva told Investment Executive that mortgage renewals are a key consideration in the Bank of Canada’s decision. “There has been a fairly good reduction in mortgage rates,” she said. “You can renew at about 4% on a five-year … Relative to a couple of years ago, that is a fairly good rate.”
Scotiabank is taking a wait-and-see approach for now. Derek Holt, vice-president and head of capital markets economics with the bank, wrote in an Oct. 23 note: “Our published forecast implies a quarter-point move but isn’t worth much at this stage before we get a LOT of data between now and then.”
The Bank of Canada hiked its target for the overnight rate in a series of moves following the Covid-19 pandemic. It reached a high of 5% in July 2023, followed by 25-basis point cuts in June, July and September of this year. A 50-basis point cut followed in October, to 3.75%. That move triggered debate about whether it signalled weakness in the Canadian economy.
A repeat of that in December may lend greater credence to that view.
Porter, with BMO Capital Markets, disagrees. “I don’t think it was really seen as a sign of trouble,” he said. “You could call it a bit of a success story, that the bank felt comfortable enough to get a bit more aggressive. … The really good news is that Canada has not had to go through a recession to get inflation all the way down from 8% [in June 2022] to 2%.”