Yahoo Finance TD's chief economist takes 'unusual position' with 25 bp Bank of Canada rate-cut call
The Bank of Canada should cut its policy rate by 25 basis points, according to TD Bank’s chief economist. It’s an out-of-consensus call from Beata Caranci, as many of her peers coalesce around a larger 50 basis point drop on Wednesday.
A poll last week by Reuters found two-thirds of participating economists see Canada’s central bank cutting by a half-percentage point, bringing its trend-setting rate to 3.75 per cent. The announcement is set for Wednesday, at 9:45 a.m. ET. It will include a Monetary Policy Report, where the Bank will spell out its rationale for the decision.
The Bank’s overnight lending rate sits at 4.25 per cent following three 25 basis point cuts in June, July, and September.
“I find myself in an unusual position of advocating for a 25-basis-point reduction,” Caranci wrote on Monday. “I might be eating crow on this rate call, but I’ll take to heart what a wise man once said: It’s best to be eaten while it’s still fresh.”
Caranci says the Bank has never accelerated a rate cut within a monetary cycle in the absence of the “whites of the eyes of a recession.”
The last time this happened was in 2001, she says, after the dot-com bubble burst in the U.S., threatening to drag Canada’s economy down with its neighbour to the south. The economist says a scenario of this magnitude is not within the Bank’s current view of the economy, nor that of her peers calling for a 50 basis point cut on Wednesday.
Caranci points to job market strength since the last two 25 basis point cuts, resulting in nearly 100,000 private sector jobs created in August and September, versus a modest loss in the prior two months.
“The bottom line: there’s no fire to douse by accelerating rate cuts,” she wrote.
TD’s chief economist says a larger cut could risk repeating mistakes made in the past, which resulted in high household indebtedness.
“One of the biggest criticisms of the central bank was its role in fuelling debt exuberance by leaving interest rates too low for too long during the late stages of the pandemic, and in the proceeding years,” Caranci wrote. “The Bank must guard against creating a market and household psychology that every hiccup to economic growth expectations necessitates a strong monetary policy response.”
Home sales climbed in August and September as buyers reacted to lower mortgage rates, which may head lower with a 25 basis point cut. At the same time, new mortgage qualification rules from Ottawa have also helped lift demand.
“The federal government has added fuel to housing demand,” Caranci wrote. “Canada’s favourite sport is back.”
CIBC’s chief economist sees it differently.
Last Friday, Avery Shenfeld laid out a case for a 75 basis point rate cut, suggesting this is more likely than a smaller 25 basis point move. However, he notes such a “mega move” is not CIBC's base-case scenario.
Shenfeld sits on the C.D. Howe Institute’s shadow central bank committee, where he says most members expect 75 basis points worth of cuts by December.
“If a 3.5 per cent or lower overnight rate is appropriate for three months from now, it’s hard to see why it wouldn’t be even better to get there sooner, in order to shorten the wait for its impacts to kick in,” he wrote in a recent research note.
“With inflation now running below the two per cent target, particularly in measures that exclude mortgage interest costs, and economic growth still subdued, the same argument could be made in reverse.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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