BoC Expected to Cut Overnight Rate by 50 Basis Points This Week: Macquarie

The Bank of Canada (BoC) is expected to lower the Overnight interest rate by 50 basis points (bp) to potentially 3.25% at its policy meeting this week. This anticipated move follows the dovish statement made by the central bank in October, which highlighted concerns regarding a weak labor market, disinflation, and declining inflation expectations. According to a note from Macquarie economists, the data since then appears to support the case for more aggressive monetary easing.

Looking ahead, forecasts extend into the first half of 2025, during which an additional total reduction of 100 bp is expected, bringing the Overnight interest rate down to 2.25%. This potential easing trajectory sharply contrasts with the US, where the federal funds rate is expected to drop only to 4.13%. Thus, the BoC's actions would represent a significant policy shift from the stance of the US Federal Reserve.

The monetary policy divergence between Canada and the US is projected to reach a spread of 175 to 200 bp. If this scenario materializes, it would create the largest interest rate difference between the two countries since the late 1990s. The potential mismatch underscores the different economic conditions and policy responses in the neighboring countries.

The possible rate cut by the BoC this week is part of a broader series of adjustments in monetary policy in response to changing economic indicators. Central banks globally are striving to maintain a delicate balance between promoting economic growth while managing inflationary pressures.