02:12 PM EDT, 10/18/2024 (MT Newswires) -- Avery Shenfeld in his regular 'The Week Ahead' note on this Friday noted markets have thrown down their 50 basis point chip on the poker table, betting that the Bank of Canada will deliver an interest rate cut of that magnitude next week. But, he asked, will the central bankers call that bet, or raise to 75?

While a "mega move" isn't CIBC's base case forecast, Shenfeld said there are reasons to think that Governor Macklem's team will give such a move more consideration than the 25 basis point cut that some economists are still projecting.

Shenfeld said: "While 50 basis point interest rate changes have historically been less common than 25 bp bumps, they're hardly unprecedented. When we've seen modest total easings or tightening cycles, like the 75 basis point lift in 2010, they've been delivered a quarter point at time. But looking at cycles in either direction that moved rates by 200 bps or more, with only one exception, the average individual change exceeded 25 bps, implying that there were some steps of 50 or more.

"What would be the logic of a 75 bp cut next week? Actually, it's a bit tougher to argue against it. We sit on the CD Howe Institute's shadow central bank committee, and all but two of the financial and academic economists on the panel recommended a total easing of 75 bps or more by December, and views at the BoC are likely similar. If a 3.5% or lower overnight rate is appropriate for three months from now, it's hard to see why it wouldn't be even better to get there sooner, in order to shorten the wait for its impacts to kick in.

"That sort of front loading was what the BoC did when it hiked rates by 100 basis points in a single step during the most recent tightening cycle. The Bank was sure that it would need at least that much tightening to address inflation risks, and getting those conditions in place sooner was appropriate. With inflation now running below the 2% target, particularly in measures that exclude mortgage interest costs, and economic growth still subdued, the same argument could be made in reverse.

"What might hold the Bank back from that step isn't anything happening in Canada, but developments south of the border. Stronger than expected readings on US employment, core inflation and retail sales, and a major upward revision to the path of household incomes, have the market dialing back forecasts for Fed rate cuts.

"Stateside, easings will be restricted to quarter point steps, with some risks of pauses along the way if we don't see better core inflation readings ahead, because the central bankers will now feel less assured about the total magnitude of this easing cycle. We were already forecasting that the Fed's easing cycle would end with rates near 3.5%, well above the 2.25% target we have for Canada. But to even get the Fed to that destination would likely require some deceleration in growth from what we've been seeing in Q3 data, which looks a bit too brisk to get inflation all the way to the 2% target.

"But markets are now unsure if the US is headed for our "soft landing" outcome or a "no landing" outcome with no growth deceleration. That poses some risks that a faster pace of easing in Canada will set off more material weakness in the loonie, since a 50 bp cut is priced-into the exchange rate, but a larger move is not. Sure, there's a benefit to a softer exchange rate as a spur to export growth, and as a cushion against a greater-than-desired drop in inflation. But a more volatile FX market makes it tougher for the Bank to calibrate how much of an easing in monetary conditions it needs to deliver through its interest rate tool. The Bank might also fear that a 75 basis point would convey a degree of panic about the economy's prospects, but it could counter that by explaining that it simply wants to get ahead of downside risks and presenting an optimistic growth outlook for 2025.

"So odds are that the Bank will simply call the market's 50 basis point bet. Waiting until December to throw another 50 bp easing onto the table might be a reasonable price to pay for less exchange rate volatility."

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