By Promit Mukherjee
OTTAWA (Reuters) -The Bank of Canada is expected to cut interest rates by 25 basis points on Wednesday, spurred by weak job reports and economic contraction in the second quarter.
It would be the first rate cut in nine months and many economists expect another 25 basis point cut either in October or December.
The BoC was one of the most aggressive major central banks globally to reduce rates when it started its easing cycle in June last year. It brought interest rates to 2.75% in March
from 5% in June last year, a 225 basis points cut in nine months.
Since then it has held the policy rate steady, citing uncertainty around U.S. tariffs.
Governor Tiff Macklem said in July that due to economic uncertainty linked to tariffs, the bank was less forward-looking than usual, but if inflation stayed under control and the economy weakened it would consider a rate cut.
"We have had two really weak employment numbers since July, so that may change the tone of the bank's view of the economy," said Doug Porter, Chief Economist at BMO Capital Markets, who expects a rate cut on Wednesday.
The Canadian economy has lost over 100,000 jobs in the last two months, pushing the unemployment level to a nine-year high outside of the pandemic years. Its economy also contracted in the second quarter by 1.6%, building up the case for a rate cut.
Overnight interest swap markets are betting the chance for a 25 basis point rate cut on September 17 is over 91%.
Macklem will announce the central bank's rate decision at 10:30 a.m. ET (1430 GMT).
The U.S. Federal Reserve will announce its rate decision at 1430 ET on Wednesday and the Fed is widely expected to reduce its benchmark overnight interest rate by 25 bps to the 4.00%-4.25% range.
There are, however, some concerns around inflation in Canada, especially the resilient core inflation, which has hovered around the 3% range, the top end of the bank's 1% to 3% inflation target range.
Inflation in August showed that the consumer price index grew by 1.9% year-over-year in August and BoC's preferred core measures CPI-median and CPI-trim were at 3.1% and 3% respectively.
Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, wrote in a note that as of August, core goods inflation (excluding food, energy and indirect taxes) had slowed to a three-month annualized rate of just 0.7% from 2.6% in July.
"That's materially below the pre-COVID average," he wrote in a note, adding that the reading sets up a 25 basis point cut on Wednesday.
(Reporting by Promit Mukherjee; Editing by David Gregorio)
