Posthaste: Don’t bank on an October rate cut with a federal budget waiting in the wings

Some economists say the

federal budget

slated for release on Nov. 4 could hold sway over future

Bank of Canada
interest rate

decisions.

The Liberal government said Canadians should expect the budget to feature a “

significant deficit,

” with some economists placing that figure as high as $70 billion, according to an analysis by Bloomberg.

Prime Minister

Mark Carney

over the weekend also warned that he plans to run a “substantial” deficit that will likely eclipse last year’s shortfall of approximately $48 billion.

As a result, some rate watchers think it might be prudent for the Bank of Canada to skip cutting rates at its next meeting on Oct. 29.

Derek Holt, vice-president and head of capital markets economics at Bank of Nova Scotia, said betting on an October rate cut is a bit “rich” given the references to the upcoming budget during the Bank of Canada’s press conference after it

cut interest rates

on Wednesday by 25 basis points to 2.5 per cent.

“Once we have the budget, we will be assessing the implications for the plans on the outlook and what we need to do with interest rates,” Bank of Canada governor

Tiff Macklem

said in response to a media question during the press conference.

Holt said that implies policymakers will wait on the budget to make their next move.

Holt isn’t the only who thinks that is the case.

“The (Bank of Canada’s) cautious approach suggests to us that a cut ahead of the federal budget in November is unlikely, barring an acceleration in the current downturn,” Nick Rees, head of macro research at foreign exchange specialist Monex International Markets PLC, said in a note. “But more accommodative policy is necessary to mitigate recession risk.”

Despite questioning whether an October rate cut jibes with a projected waterfall of fiscal stimulus, he thinks policymakers will cut by another 25 basis points at their Dec. 10 meeting to bring the benchmark borrowing rate to 2.25 per cent. The last time rates were that low was in July 2022, when they were on the way up as policymakers tried to fight off rising inflation.

Toronto-Dominion Bank senior economist Andrew Hencic also said the federal budget will likely factor in Bank of Canada deliberations.

“The ball goes into the government’s court with their budget on Nov. 4. The (Bank of Canada) will factor in spending and other initiatives for the decision in December,” he said in a note.

But unlike Monex, TD is calling for another rate cut in October.

Following the release of its decision and the press conference by Macklem, markets hiked their bets for a rate cut in October to a bit less than 50 per cent.

The cut puts the lending rate closer to the bottom end of the Bank of Canada’s neutral range — where the economy is neither stimulated nor held back — of 2.25 per cent to 3.25 per cent.

One thing many economists appear to agree on is that policymakers won’t take a one-and-done approach.

“Conventional wisdom says that if you’re going to cut once, you’re probably going to go again (does a single 25 basis-point move the needle in significant fashion?),” Taylor Schleich and Ethan Currie, economists at National Bank of Canada, said in a note.

The pair are currently predicting a follow-up cut at the October meeting, with the possibility of the rate falling as low as two per cent as economic data, including the Bank of Canada’s October Business Outlook Survey, news on the trade file and the fall budget — floods in over the next month and a half.

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• Today’s data: U.S. Philadelphia Fed Business Outlook, initial and continuing jobless claims. Canadian Federation of Independent Business business barometer for September.
• Today’s earnings: Reitmans Canada Ltd., Scholastic Corp.
  
  

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Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff, Canadian Press and Bloomberg.

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