Most Bay Street economists are looking for a rate cut from the Bank of Canada on Tuesday, although there’s no single consensus call.

According to BMO Capital Markets, the market is currently pricing-in a 25 basis point rate cut with 20% odds of a 50 bps move. A handful of economists expect no change.

BMO says that this decision will be more closely watched than the typical rate announcement because the Bank of Canada is the first of the banks that delivered a coordinated 50 bps cut earlier this month to hold a regular rate setting meeting. It suggests that the recent 50 bps move suggests that the Bank may only be inclined to go with a 25 bps cut this time.

Nevertheless, it notes that the fundamentals are increasingly gloomy. “The recent dispatches on the U.S. credit crunch and the data on the U.S. retail and industrial sectors have been downright dismal, pointing, in our opinion, to a deepening recession south of the border that will likely pull the Canadian economy into recession (albeit a shorter and shallower one than in the U.S.). The negative feedback loop between a weaker U.S. economy and tighter credit markets has been the Bank’s critical downside risk and it is rapidly becoming a reality,” it says.

CIBC World Markets is also calling for a 25 bps move, “as measures aimed at the banking sector will be used to help narrow spreads. The subsequent policy report will justify the policy turn by painting a darker picture of the growth outlook and a more benign track for inflation.”

Among those expecting a 50 bps move are RBC Economics and TD Economics. “With weaker global economic growth in store and commodity prices lowering inflationary pressures, the Bank of Canada certainly has more room to cut rates. Accordingly, we are calling for a 50 basis point cut next week, which would bring the overnight rate down to 2.00%,” TD says.

In addition, it expects that the U.S. Federal Reserve Board will also soon deliver a half point cut. “Although [Fed chairman Ben] Bernanke did not provide any indication as to the Fed’s next move, the grim outlook for the economy and easing inflation pressures augur for further rate cuts. As such, we expect the Fed to cut interest rates by 50 basis points at their meeting later this month.”

BCA Research sees the Fed possibly going even further. It says, “The combination of a deteriorating economic outlook and continued severe financial stress point to an early cut in the fed funds rate to 1%.”

“The worsening economic outlook is sustaining a high level of risk aversion on the part of lenders and investors. Of course, this creates a self-fulfilling outcome as frozen credit markets and falling equity prices directly undermine the economy,” BCA says.

“The authorities fully understand that they must break this vicious cycle,” BCA notes. “For its part, the Fed has begun to rapidly expand its balance sheet, and it is under pressure to cut interest rates again soon. The recently released Beige Book provided further confirmation that economic activity is weakening across the country, and there is little doubt that a deep rather than mild recession is unfolding. A zero funds rate within the next few months is possible if financial conditions do not soon improve.”

IE