MNI BOC WATCH: Ready To Cut As Job Worries Overtake Inflation

The Bank of Canada is widely seen cutting its key interest rate a quarter point Wednesday after three meetings on hold because of mounting evidence the U.S. trade war is causing broad economic weakness and diminishing the chance core inflation stays elevated.

Fourteen economists surveyed by MNI see a quarter-point cut to 2.5% in the decision at 9:45am EST and four see a hold. Analysts also see the need for another cut at the October or December meeting. 

Unemployment has risen to the highest in almost a decade excluding the pandemic, GDP contracted in the second quarter and economists say the last CPI report suggested core inflation will come down from a spell of running at 3%. Governor Tiff Macklem in July said a return to stimulus was possible if the economy weakened and inflation was stable.

The drag on investment and confidence from the trade war is also set to linger with officials shifting from talk of a quick deal to a fuller renegotiation of a North American pact in 2026. Canada's trade deficit has grown to a record so far this year, a big reason economists see third-quarter growth coming in at just half the Bank's estimated 1% pace. 

"For the BoC, with slack sticking around for a while, the inflation outlook looks less concerning," Ali Jaffery of CIBC wrote in a research note. “We expect to hear dovish talk aimed at solidifying expectations for another cut in October.”

JOBS SETBACK

Cutting this week and later this year would bring the policy rate to the bottom of the Bank's estimated neutral range. Former officials say that leaves Governor Macklem scope to provide a bit of stimulus with little risk of re-igniting inflation. (See: MNI INTERVIEW: BOC Has Easy Decision To Cut Next Week-Lapointe)

Core inflation measures appear to be overstating trend inflation that's perhaps closer to 2.5%, Macklem has said. There is another inflation report Tuesday that could upend things, though by that point officials will likely have written a draft communique.

The Bank cut rates seven times in a row before holding at the last three meetings as inflation faded, and officials say elevated trade-war uncertainty means they must be less forward-looking.

Bets on a rate cut solidified after employment fell 65,500 in August following a 40,800 decline in July. That swung the year-to-date jobs total into negative territory, the worst result since the global financial crisis in 2009 outside the pandemic.

"Officials indicated in July that they could support further interest rate cuts if the labour market continued to soften. That is exactly what has happened since, while the upside risks to inflation have also eased," Thomas Ryan of Capital Economics wrote in a research note.