Economist says Bank of Canada could accelerate interest rate cuts

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Ever since the United States began its interest rate campaign with significant interest rate cuts, the amount of discussion surrounding the Bank of Canada’s next major rate cut has increased.

Some economists said the Fed’s 50 basis point rate cut “left the door wide open” for the Bank of Canada to cut rates by a similar amount, as it could make the difference between a soft landing for the economy and a recession. Ta.

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Currency analysts at CIBC Capital Markets, meanwhile, said rates remained too restrictive and said there was a strong argument to lower them significantly below the standard 25 basis points per meeting.

One economist notes that, among other data points, Canada’s small business sector is raising all kinds of red flags, and more evidence is accumulating that interest rates need to be lowered more quickly. said.

Stephen Brown, Deputy Chief Economist for North America Capital Economics Co., Ltd.said the latest CFIB Business Barometer, released on September 26, showed “worrying signs” regarding the trade situation for small and medium-sized enterprises.

“Although the CFIB Business Barometer only covers small and medium-sized enterprises, in recent years the survey index has provided a fairly accurate picture of economic conditions,” he said in his analysis.

Although the barometer fell to 55 in September from 56.8 the previous month, still above 50 and unchanged, Brown said the figure was based on the annualized rate of gross domestic product (GDP) in the third quarter. The figure is about 1%, which is well below the World Bank’s expectations. Canada’s forecast is 2.8%.

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“The details were pessimistic,” he said, adding that the number of small and medium-sized businesses experiencing a “lack of demand” rose to 53.3% last month.

“This seems to suggest that the output gap (the difference between what the economy is producing and its potential) is much larger than the 1.25 per cent of GDP, as estimated by the Bank of Canada,” Brown said. .

That’s not the only thing economists found in the CFIB report that they believe the Bank of Canada will need to widen its next rate cut.

Price and wage forecasts by small businesses, as well as the number of businesses experiencing labor shortages, are all below their pre-pandemic peaks.

Statistics Canada’s job data confirms the tight labor situation. According to the agency, the number of job openings in July decreased by 4.1% to 526,900, the third consecutive month of decline and almost half the number from the peak recorded in May 2022.

Brown estimated that the current vacancy rate is 3%, lower than the 2019 average of 3.2%.

The decline in the number of small businesses founded last month was the third warning sign that flashed to Mr Brown. The number of active businesses in Canada fell by 5% in June, the most since the pandemic, according to Statistics Canada.

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“Due to the weaker pace of growth in the third quarter and a number of concerning indicators in other regions, the (Bank of Canada) announced a 50 basis point (50 basis point) increase at both its October and December policy meetings,” he said. It is likely that the Bank will cut interest rates by 50% (bp).”

The Bank of Canada’s remaining 2024 meetings will be held on October 23 and December 11.

Brown said the market is currently pricing in one 50 basis point rate cut “with 75 basis points priced in over two meetings” through the end of the year.

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A sustained run of stock gains came to an end on Tuesday as investors retreated to safer parts of the market as tensions in the Middle East escalated.

Bonds, oil, gold and the US dollar rose after Iran fired a barrage of missiles at Israel as troops marched into Lebanon, with Haven assets being bid up. According to previous reports, the United States is actively supporting Israel’s defense preparations.

Gold rose above US$2,670 per ounce during the trading day, and crude oil at one point exceeded US$71 per barrel.

“The market is in wait-and-see mode,” said Kathleen Brooks, research director at XTB. “The next 24 hours will be critical in determining how far this situation escalates and whether a rush to safe evacuation is warranted.” — Bloomberg

• Today’s data: August US ADP employment statistics, weekly mortgage application numbers
• Revenue: Levi Strauss & Co., Novagold Resources Inc., Anaergia Inc.
  

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