Canada debates whether to supersize rate cuts

The Bank of Canada has lowered the target for the overnight rate at its past three policy meetings and is expected to follow up with a fourth consecutive cut next week. The question is, will it be another 25bp move or will the bank follow the Federal Reserve’s lead and cut by 50bp?

Consumer price inflation slowed to just 1.6% year-on-year in September, undershooting the 2% target for the first time since February 2021. The bulk of the residual strength is due to housing costs, which if excluded would prompt inflation to fall below 1%. Nonetheless, we can’t pick and choose which things to exclude and include, and BoC officials remain wary about easing too far, too fast and running the risk of a return of price pressures.

At the September policy meeting, the committee argued that “excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. The Governing Council is carefully assessing these opposing forces on inflation".