A University of Windsor finance professor expects the Bank of Canada to reduce interest rates by half a percentage point when it announces the latest decision on its policy rate.
Dr. Gurupdesh Pandher, a professor of finance at the Odette School of Business at the University of Windsor, says there's been a cooling of the housing market between 2022 and 2023, and the unemployment rate has also increased.
"They have to look at the risk of continuing to maintain high interest rates and the negative impact on the economy and the housing market, potentially, and then also on the unemployment rate," he says. "I think they will probably stimulate and cover some of the negiative consequences with maybe a 50 basis points decline."
The central bank's interest rate announcement on Wednesday morning (9:45 a.m.) comes after Statistics Canada reported the annual inflation rate in September tumbled to 1.6 per cent—below the Bank of Canada's two-per-cent inflation target.
Some analysts have projected an interest rate cut of 25 to 75 basis points.
After the Bank of Canada's interest rate cut last month, Governor Tiff Macklem signaled that the central bank will be ready to cut rates more aggressively if inflation falls by too much.
He's also said that the central bank now wants to see economic growth pick up again.
The Bank of Canada has lowered its key interest rate three times so far, bringing it down to 4.25 per cent.
Now, the Bank of Canada is contending with the risk that interest rates may actually restrain economic growth by more than desired.
Pandher says the central bank has to look at the risk of continuing to maintain high interest rates.
"The unemployment rate has also increased since 2023. Instead of around 6.6 per cent, it was about 5.3 per cent around the same time in 2023. The stock market this year is up around 17 per cent as well in Canada," he says.
Although the Canadian economy has continued to grow modestly, real gross domestic product has shrunk on a per-capita basis for five consecutive quarters.
The labour market has also loosened considerably, with the unemployment rate in September sitting at 6.5 per cent—uup a full percentage point from a year earlier.
The economic backdrop paired with plummeting inflation has many forecasters convinced that the Bank of Canada will deliver back-to-back jumbo interest rate cuts in both October and December, which would bring its policy rate down to 3.25 per cent.