Economists at TD Bank Financial Group are now calling for the Bank of Canada to cut the overnight rate by 25 basis points at each of its next two meetings.

In a research note published today, TD economists say that they are now expecting 25 bps cuts on December 4, and again on January 22. “The Canadian dollar is exerting a greater drag than the Bank of Canada had expected, and Canadian inflation continues to trend persistently lower,” they say in the note.

The Bank of Canada has increasingly cited downside risks to its forecast, TD says, setting the stage
for rate cuts. “Canadian monetary policy is unusually difficult to forecast right now. Many economic variables — ranging from the Canadian dollar to the unemployment rate — are at multi-decade extremes, which makes their interpretation difficult and contributes to unusually large upside and
downside risks,” they says. “The motivation for the shift in our own Bank of Canada forecast stems from a variety of factors.”

These factors include the Bank’s recent rhetoric, the strong loonie, the credit crunch, lower inflation, and the risk of slower growth.

”Let us be clear that we are not throwing our previous assessment – that there is a lot to be positive about Canada – completely under the bus. It is absolutely true that the Canadian labour market is stunningly strong, that housing has been robust, that the outlook for consumer spending is solid, and that money supply growth is robust. But these factors increasingly appear to be swamped by the remarkable strength of the currency, the depth of the credit crunch,
and persistent softness in the U.S.”