MNI BOC WATCH:2nd Cut As Auto Jobs Drop, Cool Enough Inflation

Bank of Canada Governor Tiff Macklem is set to cut rates a second consecutive meeting Wednesday, according to an MNI economist survey, with layoffs at automakers targeted in Donald Trump's trade war appearing a bigger risk than core inflation at the top of his target band. 

General Motors and Stellantis have canceled production lines in the past week, which will likely lift unemployment already at the highest in a decade excluding the pandemic. Output was already seen barely recovering from a Q2 contraction and Macklem told reporters Friday soft growth will add to slack and weigh on confidence.

“The latest developments highlight that uncertainty remains elevated,” Macklem said at IMF meetings in response to MNI's question. He also sounded pessimistic about September's unexpectedly strong 60,000 job gain, the major bright spot in economic data in recent weeks, saying it only reduced the net loss over the past three months, and mentioning Stellantis layoffs. 

Year-to-date job creation is the worst since the 2009 global financial crisis and the merchandise trade deficit has never been wider. 

Deputy Governor Rhys Mendes told MNI in a recent interview the Bank must remain cautious given competing inflation and growth risks. Fifteen of 17 economists surveyed by MNI see a 25bp cut on Oct. 29, followed by perhaps one more in coming months. That would barely take the policy rate now at 2.5% into stimulative territory, based on the Bank's estimate of the neutral rate at between 2.25% and 3.25%. (See: MNI INTERVIEW: Further BOC Cut Unclear In Trade War Fog-Mendes)

SLACK REMAINING CONSIDERABLE

Minutes from the last meeting showed some officials saw inflation as the key danger. Core indexes have held around 3%, the top of the Bank's band around its 2% target, mostly on housing and food costs that were a problem before the trade war. The Bank's recent public remarks highlight a broader concept of trend inflation and downplayed its preferred core measures.

“Inflation continues to run above the BoC's 2% target, but that was also true when the central bank cut the overnight rate in September,” wrote Abbey Xu of RBC.

What also keeps inflation from dominating the outlook is the idea officials are in a phase of managing the biggest risks from shifting U.S. trade demands rather than being data dependent. While consumers see inflation staying elevated, two-thirds of households polled by the Bank also predict a recession.

While that's more pessimistic than the forecast of the Bank and economists surveyed by MNI who see a rebound from the Q2 GDP contraction, investors see weakness pulling inflation toward target. Bank officials also say trend inflation is more like 2.5%, a pace economists say allows rate cuts. 

Canadians are still frustrated with the jump in the cost of living after pandemic shutdowns and allowing it to build up again is a risk to the Bank's reputation. Former BOC Governor and now Prime Minister Mark Carney is also adding what the opposition calls fuel to the fire with reports his Nov. 4 budget will balloon to CAD100 billion, double the highest ever outside the pandemic. 

Deficit spending will fill the hole created by the trade war rather than fuel inflation according to economists. "Slack in the economy is expected to remain considerable. If the BoC choose to stay on hold, they it would only to delay the reduction," wrote Charles-St Arnaud, Alberta Central economist and former BOC researcher.