07:52 AM EST, 01/28/2025 (MT Newswires) -- The Bank of Canada policy meeting on Wednesday, ahead of the United States Federal Reserve, will be most interesting, said Rosenberg Research.

Traders are widely expecting that the BoC will make a quarter-point cut at the policy meeting -- swaps markets are pricing in a 90% probability that the central bank will cut its benchmark rate by 25bps to 3.0%, so the days of jumbo cuts are over, noted Rosenberg Research.

Now, never mind the tariff risk for Canada, which in Rosenberg's view would end up forcing the BoC to move rates back towards the zero-bound and send yield spreads off Treasuries to unheard-of negative levels, the BoC is still going to be too tight even after Wednesday's expected rate move.

Rosenberg pointed out that Governor Tiff Macklem continues to describe the Canadian economy as being in a chronic state of "excess supply." This notion is supported by the data, as practically every measure of inflation is below the 2.0% midpoint target and the unemployment rate, at 6.7%, is a full percentage point above the estimate of full employment (NAIRU) of 5.7%.

The BoC's estimate of where the neutral policy rate is resides within a 2.25%-3.25% range. That is the steady-state band when there is no excess supply or excess demand in the Canadian economy. That is the range reserved for an economy in perfect equilibrium -- price stability and full employment.

The output gap in Canada is now so wide, that the Taylor Rule posits that the policy rate should already be below 2% -- in fact, closer to 1.5%, stated Rosenberg. In each of the past five easing cycles and two didn't involve an official recession, the BoC ended up trimming the overnight rate to 2% or lower, it added.

Meanwhile, mostly everyone on Bay Street a timid group believes Wednesday will be the last cut and the futures market is priced for just one more move for the year to 2.75%, according to Rosenberg.

What an opportunity to be long the Government of Canada bond market and short the Canadian dollar (CAD or loonie), with or without President Donald Trump's tariffs, stated Rosenberg. The market is telling you that the BoC will do little more than bring the policy rate down to the midpoint of its estimate of where the neutral range is, which makes no sense given that the BoC continues to acknowledge that the economy isn't in balance at all but is stuck in a deflationary state of excess supply.

Rare is the day that such an opportunity and gap in logic presents itself like this one, said Rosenberg.