There may have been some headline uncertainty going into this decision, but markets and economists were clearly leaning towards this outcome. It’s the right move in our view as it would have been difficult to justify continuing with the gradual approach (i.e., 25 bp cuts) in light of a softer inflation and growth backdrop, National Bank of Canada analyst notes.
Neutral rate is between 2.25% and 3.25%
“Rather than the output gap starting to close in Q3 like the BoC had previously expected, slack absorption will have to wait at least until the fourth quarter. And while that is the baseline outlook for the Bank, we feel we’re in for a repeat of the past three months, where growth continues to undershoot the BoC’s optimistic expectations. And to be clear, their updated economic projections do look very optimistic to us.”
“Should our forecast for a continued sluggish economy materialize, a follow-on 50 basis point rate cut in December should be viewed as the overwhelmingly likely outcome. On the other hand, if the economy were to break out of its underperformance funk and GDP growth picked up in line with the Bank’s projections, a return to 25 bp cuts could be justified.”
“The Bank will continue to let the data do the deciding. Big picture, we still argue that restrictive monetary policy is no longer warranted in Canada and policymakers should quickly return to a more neutral policy stance. Note that official BoC estimates peg the neutral rate as being between 2.25% and 3.25%. A 50 bp cut in December would bring the overnight target to the upper end of that range.”
Read the full article here