Will the Bank of Canada decrease the target for the overnight rate by 25 bps at the December interest rate announcement?

This market resolves on whether the Bank of Canada cuts its overnight target rate by 25 basis points at the December announcement. The current price is just 3.5%, while our model assigns 30%, a 26.5-point edge to Yes. This is a classic case of the market pricing near-zero probability for an event with real macroeconomic support.

The key drivers: Canadian inflation has slowed to the upper bound of the target range, unemployment has risen, and GDP growth remains sluggish. The Bank of Canada is already in a easing cycle, and the December meeting is one of the last chances to act before new projections. If October-November inflation data show further deceleration, a 25bp cut becomes the base case. The market, however, treats it as nearly impossible.

For the outcome to win, only a majority vote at the meeting is needed, supported by weak employment and inflation prints. The risk is that the BoC chooses to pause and hold, citing sticky core inflation or waiting for fiscal decisions. There is also a scenario where the bank cuts by 50bp, which would still count as Yes under the question's wording.

The main risk is strong labour market data or rising energy prices that push the central bank to stand pat. But given the current risk balance, 3.5% is clearly too low, and even 30% may prove conservative.