By Mumal Rathore and Pranoy Krishna
(Reuters) – The Bank of Canada will cut interest rates by half a percentage point at its second consecutive meeting on Dec. 11, according to a majority of economists polled by Reuters, many of whom changed their minds at the announcement of a sharp rise in interest rates. unemployment.
The Bank of Canada is already well ahead of its peers in terms of the scale and speed of rate cuts. It cut rates by 125 basis points, almost double that of its southern neighbor, the US Federal Reserve, which sent the Canadian dollar tumbling.
Friday's news that Canada's unemployment rate hit an 8-year high – outside of the pandemic period – of 6.8% led several forecasters to change their forecast, from 25 to 50 basis points . This increase occurred despite the announcement that more than double the expected number of jobs were added to the Canadian payroll in November.
Nearly 80% of respondents, or 21 out of 27, predict that the Bank will cut the overnight rate by 50 basis points on December 11, to 3.25%. The others foresee a reduction of a quarter of a point.
Even if interest rate futures traders had priced in a larger move, economists say the decision is still nuanced. Some of those who moved to 50 said that didn't mean they thought it was the right political choice.
Derek Holt at Scotiabank (TSX:) was one of several rates that rose to 50 basis points on Friday.
“I hate this call because I think it's the wrong thing to do, but they will probably take the easy way out over market prices while arguing that the risk of overdoing is less than the “The risk of doing too little, which could lead to inflation is underestimated,” Holt said.
“I hope (Bank of Canada Governor Tiff) Macklem appears more circumspect and cautious if he decides to go further, because there are many arguments in favor of being very cautious on inflation until 'in 2025.”
Inflation hit the central bank's 2.0% target in October, the first increase in the annual rate since May, but in line with recent forecasts from the Bank of Canada. Signs of improvement in some parts of the economy suggest there is a risk that the situation could worsen further.
Among the big five Canadian banks, only TD expects an increase of 25 basis points.
James Orlando, senior economist at TD, noted that when the Bank of Canada accelerated its pace of rate cuts to 50 basis points in October, there were concerns at the time that it was falling behind, growth and inflation being lower than expected.
“But since then, economic data has shown more resilience, with a rebound in consumer spending, the housing market and price pressures,” Orlando wrote.
“Even with the mess in the jobs report, the economy continues to add jobs, reinforcing our view that the jobs market is on solid footing. We think this should be enough to convince the central bank to then go back to a reduction of 25 basis points week, but it will still be a close game,” he noted.
The Bank of Canada will cut rates by at least another 75 basis points to 2.50% or lower by the end of 2025, according to more than 80% of respondents. This is a stronger majority than just over half in an October poll.
It is much more difficult to predict a serious potential threat to the economy in the coming months. Since the October policy meeting, US President-elect Donald Trump has threatened to impose 25% tariffs on imports from Canada.
All 11 economists who responded to an additional question said a recession was likely if Trump followed through on his tariff threat. Eight of them said the slowdown would be slight, while three said it would be severe.
(Other articles from the Reuters World Economic Poll)
(Reporting and polling by Mumal Rathore and Pranoy Krishna; editing by Ross Finley and Diane Craft)
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