It has been viewed as a close call, but economists are now unanimous in expecting the Bank of Canada to cut rates by 25 basis points on Tuesday.

“The Bank of Canada delivers its first rate announcement of 2004 next week, and in our view, the odds favour a 25-basis-point rate cut in the Bank’s overnight rate, taking it down to 2.50%,” declares TD Bank. “This has been our call since last December’s TD Quarterly Economic Forecast, but it is by no means a done deal. As recently as the middle of this week, financial market surveys showed opinion evenly split on the question of where rates are headed.”

However, TD insists that a rate cut appears to be both the most likely outcome and the most defensible, given the balance of risks to the outlook. “In a nutshell, revisions to the real GDP data for the first half of 2003 and slower-than-expected growth in the third quarter have left the Canadian economy with more slack than the Bank of Canada was anticipating at the time of its last Monetary Policy Report.”

Couple this weak performance with the impact of the strong Canadian dollar, and a rate cut looks justified, it says. “And, we don’t think it will be the last. With the Canadian economy set to be battling the headwinds of a stronger currency for the rest of the year, the risks remain tilted towards growth falling short of the Bank of Canada’s expectations, implying a more gradual narrowing in the output gap. That builds the case for the Bank to lower rates by another 25 basis points in March, to guard against a sustained period of below-target inflation.”

The call for a cut on Tuesday is echoed by RBC Financial. “Since growth in the final three months of 2003 will not come in “well above 4%” — the bar set by Bank of Canada Governor Dodge, the Bank is therefore expected to ratify the markets view and cut the overnight rate by 25 basis points on January 20,” it says. “The press release is likely to leave the door open to future cuts as the Bank of Canada continues to assess the impact of the rapid appreciation of the Canadian dollar and the offsetting support coming from improving world growth.”

However, RBC doesn’t believe that future cuts will be necessary. It predicts that the Bank of Canada will refrain from cutting rates again in March and leave rates unchanged at 2.5% to year-end. “Our growth forecast remains unchanged for Canada and the U.S. with the latest trade numbers in the U.S. suggesting some upside risk to our forecast of 4.8% real U.S GDP growth this year. As such, monthly Canadian and U.S. economic indicators should reveal an improving economic picture for both Canada and the U.S. going forward leaving the Bank of Canada on the sidelines,” it says.

Even the perennially bullish BMO Nesbitt Burns agrees, saying, “The Bank of Canada should cut interest rates next week. They have nothing to lose and everything to gain in doing so. Inflation is extremely low and likely falling, the currency has overshot its fair-value level and likely rising, and the economy is operating well below full potential.”

“Clearly the U.S. Federal Reserve will err on the side of over-accommodation this cycle. If the Bank refrains from doing the same, the Canadian dollar will rise even faster, potentially snuffing out our nascent recovery,” Nesbitt says.”

Nesbitt predicts that the Bank will cut interest rates 25 basis points next week, and maybe even again in March. “With the U.S. current account deficit hovering close to 5% of GDP and international private sector interest in U.S. dollar assets under some recent downward pressure, a slide in the greenback to the lows of 1995 cannot be ruled out. This opens the way for meaningful further rate cuts by the Bank of Canada.”