A former member of the Bank of Canada’s governing council has suggested that the central bank should consider a substantial rate cut of 0.50% later this month. This recommendation comes from Paul Beaudry, the Bank’s former Deputy Governor, who believes a quick move towards more neutral interest rates would stimulate optimism among businesses and households.
Beaudry highlights that there are now stronger indications that wage growth, inflation expectations, and corporate pricing behavior are aligning in a way that supports lower borrowing costs. He argues that cutting rates swiftly would help guide the economy back to the Bank’s 2% inflation target.
In a recent interview on the Canadian Imperial Bank of Commerce podcast, Curve Your Enthusiasm, Beaudry expressed confidence in a potential 50 basis point cut at the Bank of Canada’s upcoming meeting on October 23. He stated, “The preconditions are in place, and it’s essential to move quickly.” He emphasized the importance of providing monetary stimulus to encourage consumer and business confidence, saying, “When you want to turn things around, you need to get confidence going.”
Shifting Rate Expectations
Beaudry’s remarks come at a time when interest rate expectations across North America are evolving. Following stronger-than-expected U.S. employment data, traders began pricing in a higher likelihood of the Bank of Canada’s overnight rate approaching 3% by mid-2024. However, the chances of a 50 basis point cut at this month’s meeting remain at around 25%.
In the interview, Beaudry emphasized that the Bank of Canada strives to communicate its intentions clearly, avoiding surprises unless absolutely necessary. “The Bank doesn’t like to shock the markets, but it will do so if the data requires it,” he explained.
The Push Toward Neutral Rates
Currently, the Bank of Canada’s benchmark interest rate stands at 4.25%, which is higher than the estimated neutral rate of 2.75%. The neutral rate is considered the level at which the economy is neither stimulated nor restricted by monetary policy. While Beaudry acknowledged some uncertainty around the exact level of the neutral rate, he reaffirmed that interest rates should be reduced swiftly. “We’ll likely see rapid movement toward neutral territory, with some fine-tuning as we approach that zone,” he noted.
Canada’s economic data continues to shape the central bank’s decisions. Statistics Canada is set to release employment data for September later this week. Despite the recent increase in the unemployment rate, which hit 6.6% in August, Beaudry suggested that the Bank of Canada still sees room in the labor market, unless there’s a significant rise in underlying inflation.
Even if the upcoming employment report shows unexpected strength, Beaudry believes it wouldn’t drastically alter the Bank’s outlook. He concluded by advocating for a bold move, stating, “There should be a really aggressive cut.”
