08:52 AM EDT, 10/23/2024 (MT Newswires) -- Financial markets are pricing in 45bps of easing by the Bank of Canada on Wednesday, said ING.

The reasoning is that Canadian inflation has now slowed below target and a soft growth picture warrants a faster, 50bps, move to neutral rates, wrote the bank in a note.

It is a very close call, but ING thinks 25bp remains slightly more likely. The core measures of inflation didn't slow further in September, and the labor market recently posted strong gains with the unemployment rate inching lower.

The growth picture is incidentally showing some tentative signs of improvement, with the BoC Business Outlook Survey (BOS) reporting a recovery in future sales expectations in Q3. If the conditions for continuing to ease policy persist, those for an outsized rate cut may not, stated the bank.

The BoC's decision Wednesday is incidentally made more complicated by the recent hawkish repricing in United States Federal Reserve rate expectations, with some FOMC members now casting doubts on back-to-back cuts into year-end, pointed out ING. The BoC has claimed its independence from the Fed, but an excessive gap with US rates may be undesirable, as it weakens the Canadian dollar (CAD or loonie) ahead of a potentially turbulent US election period, among other reasons.

The currency isn't at the top of the BoC's concerns, but a persistent depreciation in CAD can lead to higher imported costs, it added.

All in all, macro factors and the recent Fed repricing point to a 25bps cut, according to the bank. If the BoC goes ahead with 50bps, one of the reasons may be not to disappoint market pricing.

In foreign exchange, the bank thinks the balance of risks is skewed to the upside for CAD. The loonie can take a hit on a rate cut, but Governor Tiff Macklem might not want to endorse expectations for back-to-back 50bps reductions, and the CAD curve doesn't have much more room to shift lower.

ING continues to expect CAD outperformance versus other commodity currencies into the US election thanks to the loonie's lower exposure to Donald Trump-related risk.