With Monday’s weak GDP results, Bay Street economists are debating whether the Bank of Canada will cut rates by 25 or 50 basis points at today’s rate setting.

BMO Capital Markets notes that the downside surprise in growth and the steep drop in December, “further ramps up the pressure on the Bank of Canada to cut aggressively tomorrow. But the break-down of Q4 GDP greatly complicates the bank’s decision — while net exports are faltering badly, domestic spending is on fire, and rate cuts will simply add to the flames.”

That basic debate has economists divided over the Bank’s next move. “The economy has to dig itself out of a huge hole in monthly GDP just to have positive growth for Q1. That should be helped by a rebound in automotive activity, but still, even our tame 0.9% first-quarter outlook now has downside risk,” notes CIBC World Markets.

“A 50 bps cut by the Bank of Canada looks to be a no-brainer, with core inflation tame, and exports in a deep dive,” CIBC says, noting that it is calling for 100 bps in total cuts from the Bank of Canada in the next three meetings.

RBC also says it sees the Bank of Canada cutting the overnight rate by 50 basis points at tomorrow’s meeting; as does TD Economics. “We think that Governor Carney is going to start his new term with a bang, with the Bank of Canada performing its first 50 bps rate cut since November 2001,” TD says.

“While the domestic side of the Canadian economy is holding up reasonably well, the bigger issue is the downside risk coming from a quickly weakening U.S. economy. The Bank of Canada has a history of cutting rates in larger increments when the U.S. economy is looking like it’s in trouble, as they cut rates by 50bps or more four times during 2001. In fact, the parallels between the current situation and 2001 are rather remarkable,” TD adds. “In the current situation, we think that the case for a bigger 50bps rate cut is at least as compelling as in 2001, and that the Bank of Canada should have no problem defending such a bold decision.”

However, Global Insight Inc. says it expects the Bank to go for only 25 tomorrow, to be followed by at least another 25 and perhaps 50 in the coming months. “The Bank’s reaction will depend largely on the expected action from the Fed, where the consensus seems to be moving from an additional 100 basis points to perhaps only 50. The Bank will keep its eye on the Canadian dollar, ensuring that a stronger dollar does not provide too much contraction to the economy,” the firm adds.

National Bank Financial allows that, the soft headline GDP number in Canada does argue for further rate cuts. “This being said, we do not view this morning’s data as weak enough to justify an acceleration in the pace of rate cuts by the Bank of Canada in the context of surging domestic demand and upcoming fiscal relief (worth 1.4% of GDP). U.S. economic woes which are impacting Canada’s manufacturing sector are being attended to by very aggressive Fed easing and fiscal stimulus. Under these circumstances, we still believe that a gradual approach to monetary easing by the Bank of Canada still makes sense,” NBF says.

Yet TD insists that, “Central bankers in both Canada and the U.S. have demonstrated that proactive behaviour is clearly in vogue, and that 50 is the new 25 when it comes to rate cuts.”

“Again, since monetary policy acts with a lag, this begs the question “why wait?” We think that the Bank of Canada will once again act proactively, and will cut rates by a deeper 50bps in an effort to get a head-start on fending off the upcoming economic weakness. And, with the risks to the inflation outlook still tilted squarely to the downside, this will not be the end of the rate cutting cycle for the Bank of Canada. We expect to see a follow-up 25bps rate cut at the next FAD on April 22,” TD concludes.