06:26 AM EDT, 09/04/2024 (MT Newswires) -- The Bank of Canada (BoC) is set to cut the key policy rate by another 25bps on Wednesday at 9:45 a.m. ET in what will be the third consecutive cut of that size, said Mitsubishi UFG.

The OIS market is currently priced for 30bps implying a small risk of a larger-than-expected cut on Wednesday, wrote the bank in a note to clients.

MUFG doubts the BoC will take that bolder step but Governor Tiff Macklem is certainly in a position on Wednesday to emphasize the scope for further easing ahead. With the United States FOMC about to commence its easing cycle, the BoC has a little more license to confidently signal the scope for further easing ahead.

Since the BoC began cutting on June 5, the Canadian dollar (CAD or loonie) has advanced by about 1.0% versus the US dollar (USD), pointed out the bank.

Since the last cut in July, Canada has had another favorable inflation print with the underlying trimmed mean and median annual rates coming in 0.1ppt lower than expected. The median annual rate at 2.4% is now just below the mid-point of the 1.0%-3.0% range.

Given the broader moves in commodity prices and energy in particular, the BoC may well see increased risks of inflation extending lower from here, stated MUFG. While real gross domestic product (GDP) growth on a quarterly seasonally adjusted annual rate (SAAR) basis did come in stronger than the BoC expected at 2.1% other data was weaker with the jobs data confirming two consecutive declines in employment. While only very small declines it was the first back-to-back decline in employment since August-September 2022.

Assuming the BoC doesn't cut by 50bps and there is no strong guidance on a plan to do so, MUFG sees limited scope for yields to extend lower. The OIS implies the policy rate will approach 3.00% by the middle of next year, which suggests a steady rate-cutting cycle in 25bps clips with some risk of a 50bps cut along the way.

The 3.00% policy rate is about 40bps lower than where financial markets see the fed funds rate -- implying some narrowing going forward which will help support CAD and limit upside pressure for USD/CAD, added the bank. Given the BoC began cutting in June, there is less need at this juncture to become more aggressive in easing and that should help ensure continued CAD support.