Goldman Sachs expects the Bank of Canada to deliver a 50bps rate cut at this week's policy meeting, although it admits a 25bps cut is a credible alternative. Slow growth, a rising unemployment rate, and a lower-than-expected Q3 GDP print will strengthen the case for more aggressive easing.
Key points:
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Expected cut rate:
- Basic Case: A 50bps cut, bringing the policy rate closer to the lower end of the BoC's neutral range estimate of 2.25%.
- Another Scenario: Cut 25bps less, reflecting cautious adjustments amid uncertain economic conditions.
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Economic drivers:
- Weak growth: Q3 GDP expanded just 1.0% (against the BoC forecast of 1.5%), underlining economic softness.
- Labor market relations: The unemployment rate has risen after a brief period of stability, adding urgency to policy easing.
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Outlook USD/CAD:
- Near term effect: A 50bps cut could weigh on USD/CAD, indicating a policy divergence with the Fed.
- Mid-term outlook: Goldman Sachs sees the market weighing on the BoC's easing potential and expects more USD/CAD upside due to risks related to tariffs and Canada's weaker economic path.
Conclusion:
Goldman Sachs expects a 50bps rate cut from the BoC, driven by disappointing growth and labor market data. A smaller cut of 25bps is possible but less likely. The expected policy move could push USD/CAD higher in both the short and medium term, especially given Canada's economic vulnerability and uncertainty related to tariffs. ' to continue.
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