02:10 PM EST, 12/06/2024 (MT Newswires) -- Avery Shenfeld has used his 'The Week Ahead' note on this Friday to address those who have been questioning CIBC's long held forecast that the Bank of Canada will, and ought to, deliver a second consecutive 50 basis point rate cut in its December announcement next week.

Shenfeld said: "Virtually every Canadian forecaster has projected that the Bank will have to take the overnight rate to 3% or less in the months ahead to generate its targeted pick-up in growth. If so, there's no reason to think that cutting 50 basis points, to 3.25%, could be overdoing it. So "why not" get there next week, rather than early next year, if we're going to end up needing even more interest rate relief in 2025? Why not give the economy more of what it needs a bit earlier?

"It's not as if a half point move would send inflation roaring ahead. In the Bank's way of looking at the inflation outlook, the key driver is the output gap, and today's labour market data were consistent with considerable economic slack. Take mortgage interest out of the inflation tally, since rate cuts will cool that component, and the 12-month CPI has been running below the Bank's 2% target for much of 2024.

"Looking deeper into 2025, there are upside and downside risks to our forecast for a move to a 2.25% overnight rate by mid-year. That's only about a half point below our estimate of the neutral rate, and hardly seems like overkill for an economy that needs monetary stimulus to get moving at a better clip.

"What could eliminate some of that need is a turn to material fiscal stimulus. We're not talking about the short-lived blips inherent in the recently announced sales tax holiday on certain items, or the one time cheques to workers, each of which is worth a decimal place or two of GDP. But the Prime Minister revealed this week that the Fall Economic Statement (FES) would include "investments in economic growth across the country." That sounds like something beyond a very partial GST holiday and a $250 cheque. To substitute for some rate cuts, these "investments" would have to be large enough to move the GDP needle, represent fresh expenditures or tax cuts rather than reallocated funds, and delivered on a timely basis.

"There are lots of cases of counter examples from past budgets that didn't meet those tests, particularly when budget deficit targets lacked a lot of elbow room. Some years we've seen long lists of small initiatives that added up to not much, or simply shuffled spending from one envelope to another. On other occasions, it took many years for the announced funds to be actually allocated to projects on the ground. That was the case for a previous deluge of infrastructure funds offered by the Liberal government, for example. Ottawa recently announced a $1.2 billion contribution to Toronto transit, but that will mostly go to subway cars that aren't set to be delivered until 2030 in a contract that won't even be awarded next year. So we'll need to carefully dissect the details of any FES announcements to see if they reduce the case for 2025 rate cuts.

"Indeed, the Bank of Canada could find itself needing to be even more aggressive. The threat of US tariffs will already weigh on business capital spending here while we wait to find out if they are actually imposed. If Trump follows through, the dent to Canada's exports would necessitate even further monetary policy easing to support domestic demand.

"Retaliatory tariffs by Canada would complicate that decision, by raising prices for imported goods. But that might be a good answer to the question "why not" if posed about such a retaliation. Rather than hit Canadians' wallets, Ottawa might opt to seek other means (a Florida travel boycott? Repatriate our hockey players? No Ryan Reynolds movies?) to get the Trump team to drop a tariff war. "

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