MNI INTERVIEW: BOC Has Easy Decision To Cut Next Week-Lapointe

The Bank of Canada is bound to cut its policy rate next Wednesday and at one of two other remaining meetings this year after compelling evidence of weakness in the job market and the broader economy that will pull down elevated inflation, former finance department economist Dominique Lapointe told MNI.

“It’s going to be an easy decision and message for them on this one,” he said. That view contrasts with the last few meetings where investors were somewhat divided on whether the Bank would act. 

Governor Tiff Macklem lowered rates seven times between last June and March before holding at the last three meetings, saying a return to stimulus was possible if the economy weakened and inflation was stable. Since then, unemployment has risen to the highest in almost a decade excluding the pandemic and GDP contracted in the second quarter, in line with the Bank's projection.

The biggest trade war with the United States since the 1930s also lifted Canada's trade deficit to a record so far this year, and Lapointe said the chill on hiring and investment will linger as U.S. President Donald Trump returns to threats of scrapping a North American trade deal as it comes up for a reset next year. 

“I doubt that we are going to get the sort of rebound that would prevent the (Bank) from doing a second cut this fall. I doubt that we're going to get any sort of trade deal with the U.S. soon that would boost confidence and boost capital spending,” said Lapointe, now macro strategy director at Manulife Investment Management in Montreal. 

STICKING TO MESSAGE

The Bank's July scenario if tariffs remain stable was for GDP to rebound with third-quarter growth at a 1% annualized pace, but many economists predict something more like 0.5%, a rate that would likely add to idle capacity. 

“They're going to stay very data dependent. So we're going to see the same message: if conditions worsen, then maybe the economy will require more accommodation,” Lapointe said. (See: MNI INTERVIEW: Mild Stimulus Cures Canada Recession- Ex-Clerk)

Cutting rates a second time at the October or December meeting would simply bring the overnight rate to the bottom of the Bank's neutral range at 2.25%, Lapointe said, insulating officials against the idea of re-igniting inflation. The latest CPI report also provided some evidence core inflation has stabilized, he said.

Bank officials say core indexes running at 3% may overstate trend inflation that's around 2.5%. Lapointe said recent weak data solidify the view economic slack will pull down inflation. Canada also dropped counter tariffs on the U.S. Sept. 1 and the country's dollar has been robust this year, further reason to believe inflation is cooling, he said.

As for why two cuts are enough to rebalance the economy, Lapointe said Canada is likely to eventually reach some sort of trade deal with the Trump administration, even if it's not as favorable. While the job market has weakened, companies aren't making panicked layoffs, he said, and continued government deficits will provide some offsetting boost to demand. (See: MNI: Canada Approved CAD95B Geopolitical Contingency Borrowing)

“There's no forecast for a large recession that would require deep cuts,” said Lapointe. “They're going to say we need to do a little more to support business and households.”