One veteran economist says he expects the Bank of Canada to lower its key policy rate by 25 basis points Wednesday while signalling more cuts ahead, but says he disagreed with the consensus around a soft landing.
According to a survey by Bloomberg last week, Canada’s central bank is not expected to deliver outsized rate cuts going forward. Instead, most economists surveyed are predicting 25 basis point cuts at the next five announcements until its key policy rate hits 3.25 per cent.
Bloomberg News also reported that none of the 18 analysts surveyed predicted the Bank of Canada to cut rates by 50 basis points or more at any policy decision announcement going forward.
“I think that the bank will cut 25 basis points and the press statement will leave the door open for more and probably a lot more,” David Rosenberg, the founder and president of Rosenberg Research, said in an interview with BNN Bloomberg Tuesday.
He added that the central bank is likely to “tell us that this is a (rate cutting) process that’s probably in its early stages.”
In a statement to BNNBloomberg.ca Tuesday, Global X Research Analyst Brooke Thackray said he expects a 25-basis point cut from the Bank of Canada instead of a 50-basis point cut, “unless it wants to cause a panic.”
“The financial markets are largely anticipating a 25 bps (basis point) cut. Some economists are calling for 50 bps, which would signal that economic conditions are much worse than previously thought,” he said.
“An oversized cut would indicate that the Bank of Canada has pivoted from a steady and measured policy adjustment and would go against Tiff Macklem’s recent communication to the markets.”
Soft landing
Bloomberg’s survey found optimistic forecasts regarding a soft landing. Over two-thirds of economists predicted annual inflation returning to the Bank of Canada’s two per cent target between the second and fourth quarter of next year, while only 38 per cent anticipate net job losses to rise above 30,000 in one month over the next half of the year.
Thackray said the economy “seems to still be on stable footing” while noting that the unemployment rate is at 6.4 per cent “which is still at the low end of the historical range for Canada.”
“Unemployment is a lagging indicator and reflects the economic conditions of the past. Although the rate is still low, there is a definite trend higher from the 4.9 per cent low in 2022,” he added.
However, Rosenberg said he disagrees with calls for a soft landing.
“Firstly, how (can) anybody define a soft landing when on a real per capita basis, the economy here has been contracting for five straight quarters and is running negative 2.4 per cent year over year,” he said. “So, if that’s your definition of a soft landing… You redefine what a soft landing is.”
Rate path
Rosenberg said the Bank of Canada should bring its policy rate to a neutral rate of interest during its cutting cycle.
“The Bank of Canada let the cat out of the bag at the last meeting…when they used the words ‘excess capacity’ no fewer than three times. And we’re at 4.5 per cent on the overnight rate,” he said.
“So, if we’re talking about an economy that is out of equilibrium in the sense that we have excess supply, the policy rate should be no higher than neutral which the Bank of Canada has told us their estimate is 2.75 per cent.”
