OTTAWA: The Bank of Canada is likely to cut interest rates by half a percentage point for a second consecutive meeting, bringing borrowing costs to more neutral levels and better positioning the economy for the potential crosswinds of a tariff war.
Markets and most economists expect policymakers led by governor Tiff Macklem will cut the benchmark overnight rate by 50 basis points.
That would bring the policy rate to 3.25%, the top end of the range of the central bank’s estimate for the neutral rate – a theoretical level where borrowing costs neither stimulate nor restrict the economy.
With inflation hovering near the 2% target, the central bank has said it’s now looking for economic growth to pick up in order to achieve a soft landing.
In October, the Bank of Canada cut borrowing costs by half a percentage point. A second move of that magnitude is likely to give the economy a stronger boost.
“We’re still in that excess-supply zone for the economy and it doesn’t look like the output gap is closing in the direction that the bank wants it to,” Veronica Clark, an economist with Citigroup, said in an interview, meaning the economy is underperforming relative to its potential.
“The Canadian economy doesn’t need restrictive rates anymore.”
After overseeing one of the most difficult inflationary periods in the central bank’s history, Macklem is now faced with normalising rates, while weighing a response to a potential trade dispute.
The severity and duration of that battle will be unknown until Donald Trump is inaugurated and his policy is fully outlined.
Macklem’s task is with keeping focus on monetary policy that suits the lacklustre near-term data, while communicating that the central bank will not react to trade threats or incorporate them into its models until it has more clarity.
“There is a reasonable case to be made that the deepening trade uncertainty with the United States is alone a justification for an easier stance, to help inoculate the economy from external pressure,” Doug Porter, chief economist at the Bank of Montreal, wrote in a report to investors.
Last month, Trump said he’d apply 25% tariffs to all Canadian goods imported into the United States, a move that would shatter Canada’s economy, and a threat he repeated this week. — Bloomberg
