07:38 AM EST, 12/11/2024 (MT Newswires) -- The Bank of Canada makes its policy announcement at 9:45 a.m. ET on Wednesday, with a press conference to follow at 10:30 a.m. ET, noted Bank of Montreal (BMO).

The bank and markets expect the BoC to cut rates by 50 bps. October's 50bps cut was driven by weaker growth and inflation figures and a slackening labor market.

Since then, the data have been mixed, with inflation above expected and the gross domestic product figures open to interpretation, stated BMO. However, the labor market data weakened materially, with the jobless rate surging 0.3 ppt to 6.8% in November. That's a fresh cycle high and the highest since early 2017 -- excluding the COVID-19 pandemic.

The bank also points out that there are risks to a 50bps move that shouldn't be ignored. The Canadian dollar (CAD or loonie) is the weakest in four years, and trading at levels only seen during crises over the past two decades.

Canada's highly leveraged consumer sector has been a material drag on growth the past couple of years, driving the BoC to start cutting rates ahead of, and more aggressively than, the United States Federal Reserve, added BMO. That's been an increasing overhang on the loonie.

In addition, the threat of tariffs on exports to the US risks a significant further depreciation of the currency. With Canada-U.S. interest rate spreads already around -100 bps -- or more depending on where on the curve -- a 50bps cut would push spreads to fresh extremes, hammering the loonie.

Recently emerging from the first inflation surge in decades suggests that businesses could be more willing/able to pass along price increases. Groceries, which are a particularly sensitive spot for Canadians, would see almost immediate pressure as winter drives increased imports of fresh food. The potential impact on inflation and inflation expectations shouldn't be overlooked, according to the bank.

The Canadian dollar sits at $1.419/USD (70.5 US cents) ahead of Wednesday's interest rate announcement. With a 50bps rate cut almost fully priced in, such a move shouldn't surprise the currency, but it's another signal that Canada-US spreads continue to widen, said BMO.