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While a federal government’s GST break is expected to lower inflation temporarily, some economists say the proposed tax relief and rebate measures announced on Thursday could result in a slower pace of rate cuts for the Bank of Canada and take a jumbo rate cut off the table for December.
Prime Minister Justin Trudeau announced on Thursday that his government plans to temporarily lift the federal sales tax on a range of items, including toys, diapers, restaurant meals, beer and wine, from Dec. 14 to Feb. 15. The government also unveiled the “Working Canadians Rebate,” which would provide Canadians who worked in 2023 and made less than $150,000 with a cheque for $250 in the spring.
Desjardins managing director and head of macro strategy Royce Mendes wrote in a note on Thursday, shortly after the federal government’s announcement was released, that while the sales tax exemption would mechanically lower inflation, “the Bank of Canada will look through that type of move.”
“Central bankers will be more interested with the impacts on growth and underlying price pressures,” Mendes wrote, noting that the total cost of the package is estimated to be roughly $6.3 billion, adding up to about 0.2 per cent of GDP, boosting growth.
“The announcement should all but close the door to a 50 basis point cut next month,” he wrote.
BMO managing director Benjamin Reitzes wrote on Thursday that the stimulus is “meaningful.” Even assuming many Canadians will opt to save their stimulus cheques (the Ontario government will also be sending out stimulus cheques in the new year), BMO expects the GST rebate will increase spending. It boosted first quarter GDP growth estimates from 1.7 per cent to 2.5 per cent, but noted a “steep deceleration in headline CPI” is expected for December and January, with a re-acceleration set for February and March.
“For the Bank of Canada, the combination of the new stimulus, a more cautious Fed, upside inflation miss, along with an anticipated upward revision to GDP, should solidify expectations for a 25 basis point rate cut in December, all but taking a 50 basis point cut off the table,” Reitzes wrote.
“The Bank remains on a path to neutral, but there’s heightened uncertainty on where that is given the U.S. neutral rate is a significant input (and also very uncertain at the moment).”
The Bank of Canada is scheduled to issue its final interest rate decision of the year on Dec. 11. The central bank has issued four consecutive interest rate cuts since June, including a jumbo-sized 50 basis point cut in December, bringing its policy rate to 3.75 per cent. While Governor Tiff Macklem did not rule out a second 50 basis point cut at its decision in October, he said that pace and timing of cuts is going to depend on how economic data evolve.