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It's only a matter of time before the Bank of Canada cuts interest rates

Bank of Canada Governor Stephen Poloz speaks during a news conference with Senior Deputy Governor Carolyn Wilkins in Ottawa, Ontario, Canada, July 10, 2019. REUTERS/Chris Wattie

Few expect the Bank of Canada to cut its key interest rate at the Sept. 4 meeting.

But, the central bank has some serious thinking to do in the coming months amid talk of a looming recession and a U.S. Federal Reserve that’s been cutting rates. Of course, Governor Stephen Poloz has the luxury of quiet reflection, compared to the verbal abuse Fed chair Jerome Powell has to put up with from U.S. President Donald Trump.

Most of the economists polled (10 of 12) in a report by Finder expect the Bank of Canada to stand firm at 1.75 per cent on Wednesday. Only two think there will be a rate cut.

“Domestic economic conditions do not warrant a change in the Bank of Canada's target overnight rate at this stage: inflation is at target, real policy rates are negative, the housing market is strengthening, household credit growth is firming, and wage growth is very strong,” said Brett House, deputy chief economist at Scotiabank, in the report.

But standing on the sidelines could cost the BoC — four economists polled said the rate should be cut now.

“My own opinion is that there is a high risk of recession and getting ahead of the curve by cutting interest rates can offset the costs of that hazard,” said Lars Osberg, professor of economics at Dalhousie University, in the report.

The upcoming federal election is another reason the bank might want to consider making its move now.

“If it does not move in September, then if any further negative economic news surfaces, it will be forced to move in October and involve itself in the federal election. If it decides to wait until the December meeting, it could be too late and the necessary remedy would need to be stronger. Better to do it now,” said Moshe Lander, professor at Concordia University, in the report.

Although there’s disagreement about when the Bank of Canada will blink, all of the economists say the next move is down.

If something like a prolonged U.S./China trade war gets out of control — causing a severe downturn, the bank could potentially even consider negative interest rates. Most economists say we’re not at that stage yet.

“Rates can be cut down to zero if need be, and judging by the experience in Europe and Japan, can even go negative if need be. Canada is not there...yet,” said Carl Gomez, SVP Research and Strategy at QuadReal Property Group, in the report.

The last time the Bank of Canada cut rates was in 2015, as the Canadian economy grappled with tumbling oil prices.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitte@jessysbains

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