Bank of Canada Rate Decision Forecast: Markets Price 80% Probability of 50bps Cut, Near Certainty (100%) of -25bps Move

December 10, 2024

Market Positioning & Policy Expectations

The Bank of Canada appears poised to deliver another substantial 50 basis point rate cut at tomorrow's meeting, bringing its benchmark rate to 3.25%, as mounting evidence of economic weakness overshadows lingering inflation concerns. Market expectations for an outsized cut have surged to 80% following Friday's labor market data, which revealed unemployment climbing to 6.8% - the highest level in nearly eight years outside the pandemic period.

Economic Context & Policy Rationale

The anticipated move reflects a delicate balancing act between addressing deteriorating economic conditions and maintaining price stability. While headline inflation has reached the bank's 2% target, the broader economic landscape presents compelling arguments for continued aggressive easing. GDP growth significantly undershot the central bank's projections in the third quarter, and the labor market's pronounced weakness suggests mounting slack in the economy.

Currency Implications & Risk Assessment

However, this monetary policy trajectory carries notable risks. The widening interest rate differential with the U.S. Federal Reserve has already pushed the Canadian dollar to multi-year lows around 70.5 cents USD. Further aggressive easing could exacerbate currency weakness, potentially introducing inflationary pressures through higher import costs. Yet analysis suggests these effects may be contained, given imported goods represent only about 10% of the typical consumer basket.

Forward Outlook: 2025 Trajectory

Looking ahead to 2025, markets appear to underestimate the potential for further policy divergence between Canadian and U.S. rates. The Fed's relatively hawkish stance amid continued U.S. economic resilience contrasts sharply with Canada's deteriorating outlook. Additional headwinds loom from potential U.S. trade policy shifts under the incoming Trump administration, which has proposed significant tariffs on Canadian exports.

Strategic Implications & Recovery Timeline

The central bank's aggressive front-loading of rate cuts, while presenting near-term challenges, may accelerate the path to economic recovery. Market participants anticipate an economic rebound in the latter half of 2025 as the cumulative effects of monetary easing filter through the economy. However, this outlook remains heavily contingent on external factors, particularly U.S. trade policy developments and their implications for cross-border commerce and currency markets.