Bank of Canada Governor Tiff Macklem is widely expected to introduce another oversized interest-rate cut on Wednesday, continuing a monetary easing policy launched in the summer.

Most economists anticipate that the central bank will implement a 50-basis-point reduction that matches the October drop. If it occurs as expected, this week’s cut will be the fifth consecutive reduction following a prolonged series of holds and hikes,, bringing the BoC’s policy rate down to 3.25% from its current 3.75% level.

Until recently, markets had anticipated a more modest 25-bps cut this week, according to the Globe and Mail. However, a sharp rise in Canada’s unemployment rate to 6.8% in November—the highest outside the pandemic since 2017—has shifted expectations. LSEG data shows an 85% probability of a 50-basis-point cut, the Globe reported.

Meanwhile, 21 out of 27 analysts polled by Reuters, including economists at Canada’s six largest banks, now expect the BoC to act aggressively again.

The recent surge in unemployment and weaker-than-expected GDP growth have led many to see the case for another large cut as compelling.

“Essentially, it looks like inflation is back under control, the economy is much softer, and the trend has been continuing to soften, and yet we still have a restrictive level of interest rates with the overnight rate still historically high,” Nathan Janzen, assistant chief economist at Royal Bank of Canada, told the Globe.

The annual Consumer Price Index (CPI) inflation rate hit the BoC’s 2% target in October and has remained within the bank’s control range throughout the year. Despite these developments, the Canadian dollar has weakened significantly, trading near a four-year low of 70.6 cents against the U.S. dollar.

Benjamin Reitzes, managing director of Canadian rates at Bank of Montreal, warned in an interview with the Globe that further rate cuts could accelerate the currency’s decline.

“While the move in the currency over the past number of months has been relatively orderly … you run a risk of the currency really weakening at a much faster pace that makes policymakers uncomfortable,” Reitzes told the Globe.

He noted that the weak loonie could strain Canadian households.

“As the currency weakens, especially in the winter months, it will be detrimental to Canadians in general who have to pay higher prices for food and gasoline and other things that are imported, and that’s not a positive for Canadian living standards,” he told the Globe.

Royce Mendes, head of macro strategy at Desjardins, who continues to forecast a smaller 25-bps cut, attributes the unemployment rate increase primarily to a surge in labour force participation rather than layoffs.

“It’s hardly convincing evidence that you need to absolutely cut rates by another 50,” Mendes told the Globe. “Two consecutive 50 basis point cuts, when neither the Canadian nor the U.S. economy is in free fall, would be unprecedented.”

He also raised concerns about policy divergence with the U.S. Federal Reserve, which could push the loonie even lower.

“If central bankers are truly taking a risk management approach to decision-making, then they need to consider the consequences of making a policy error,” Mendes told the Globe.

While some economists have adjusted their forecasts to align with market expectations, not all are convinced a 50-bps cut is the right policy move, Reuters reported.

Derek Holt, head of capital markets economics at Scotiabank, changed his forecast to a 50-bps after Friday’s jobs report but expressed frustration to Reuters about the BoC’s potential decision.

“I hate the call because I think it’s the wrong thing to do, but they are likely to take the easy way out relative to market pricing while arguing that the risk of doing too much is less than the risk of doing too little that could see inflation undershoot,” said Holt.

“I hope that Macklem will sound more circumspect and cautious if he does go big as multiple arguments lean toward being very cautious on inflation into 2025.”

James Orlando, director and senior economist at TD Economics, said in a research note that economic data has shown more resilience since the October 50-bps cut, which came after weak economic growth and an inflation undershoot raised fears that the BoC was behind the curve. Consumer spending, the real estate market and price pressures are rebounding and, espite the latest employment report, jobs are being added.

“We think this should be enough to convince the central bank to revert to a 25-bp cut next week, but it will remain a close call for the central bank,” Orlando wrote in the research note, which TD Economics provided to Connect Capital CRE.

A 50-bps cut would bring the policy rate to the upper limit of the BoC’s neutral range—an interest-rate level that neither stimulates nor restrains economic activity. Such a move could put the BoC further ahead of the U.S. Federal Reserve in easing monetary policy, potentially widening the gap between the two central banks’ interest-rate policies.

As the BoC’s decision looms, economists continue to debate the balance between economic support and the risks associated with further weakening the Canadian dollar, the Globe reported.

Photo: Bank of Canada Governor Tiff Macklem