Are we seeing 50 basis point rate cuts? – Commerzbank

Bank of Canada (BoC) Governor Tiff Macklem recently suggested that a further 50 basis point rate cut may be appropriate in the coming months. The market has already priced this price in quite well, expectations have corrected significantly in recent weeks, notes Michael Pfister, FX analyst at Commerzbank.

The BoC will accelerate the pace of rate cuts in the coming months

“The market now expects a cut of around 25 basis points in each of the next seven meetings. A move of 50 basis points in each of the next two meetings is even valued at about 50% probability. If this were to happen, the BoC would have halved the key rate in just under 15 months to the middle of next year.”

“At first glance, this acceleration may seem surprising. After all, the BoC has already cut interest rates three times by 25 basis points in the past two months, putting it in the middle of the G10 pack on policy rates, while other central banks are still hesitating. But there are good reasons for this. Canadian headline inflation recently fell back to the middle of the BoC’s target range at 2% annually.”

“In the short term, a tighter-than-necessary monetary policy can have a stabilizing effect on the CAD. In the medium term, however, the picture is likely to be different. We are already seeing clear signs of a slowdown in the labor market. And growth is not as strong as it once was. There is therefore a strong case for the BoC to accelerate the pace of rate cuts in the coming months – and the CAD is likely to suffer again.”