It came as a shock to just about everyone when Bank of Canada governor Stephen Poloz announced the central bank would lower its benchmark lending rate in January to 0.75 per cent.

That's because after more than four years with a historically low one per cent, Canadians had been hammered with repeated warnings to pay down debt because lending rates were bound to go up — at some point.

Then a cratering oil price changed the narrative. When the bank cut rates in January, it was six months into an oil drop that saw crude go from $95 a barrel this time last year to under $50. That was devastating for the oil patch — but also for the rest of Canada's economy. 

"This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada," the bank said in explaining its bombshell rate cut.

Eagle eye on inflation

Although the bank keeps an eye on all sorts of economic data, the most important one from a monetary policy perspective is inflation — the upward creep of prices over time. The bank has a mandate of inflation targeting because according to many economists, if you can keep inflation in a narrow band between one and three per cent, everything else in the economy — from jobs, to GDP and the like — tends to take care of itself.

Lower lending rates make borrowing easier, which stimulates spending and investing, which nudges up inflation. Raising rates does the opposite. At least, so goes the theory. 

You can't put the bullet back in the chamber after it has been fired.- Scotiabank economist Derek Holt

When the bank cut rates in January, it raised the possibility of another one down the line. With Canada's inflation rate currently at 0.9 per cent, there would seem to be ample wiggle room to cut again.

Although Poloz and company declined to do so in subsequent meetings in March, April and May, another cut is very much on the table. Opinion is divided, however, as to whether that's a good idea: about half of the 35 economists Bloomberg monitors on the subject expect a cut. The remainder expect the rate to stay the same.

The bear's view

Among those who say the bank needs to cut is David Madani, an economist with Capital Economics in Toronto. His main reason for advocating that has nothing to do with inflation and is instead rather simple: the economy is shrinking.

Official GDP data from Statistics Canada shows that the economy has shrunk in each of the first four months of this year — two months away from the technical definition of a recession. In April, the central bank said it was expecting 1.8 per cent growth for the first two quarters, an assumption that seems very out of reach now.

BANK OF CANADA

All eyes will again be on the Bank of Canada today to find out its next decision on lending rates. (Chris Wattie/Reuters)

The economy would have to have grown by 0.6 per cent in both May and June to achieve that. Considering the impact we already know that things like Alberta wildfires have had on the economy, "the odds of the economy growing by 0.6 per cent are about as high as Europe's lenders forgiving Greece's debts," Madani says.

"It's hard to see how the bank could not cut rates when the economy is in recession," he adds.

Indeed, it's why Madani is calling for not only a cut to 0.5 per cent on Wednesday, but another one to take the rate to 0.25 by year's end.

The case for standing pat

Scotiabank economist Derek Holt thinks Poloz should keep the rate where it is, arguing the economy is not in such bad shape when you peek below some of the headlines. Even in a time of a shrinking economy, Canada has added almost 200,000 net new jobs since the oil price slowdown began last summer, Holt notes.

"During past periods of sharp oil price declines we would have seen a jobs hit by now," he says, and that's just not happening. The economy added almost 60,000 jobs in May, he notes, before giving some of those back in June.

"I believe there is a high bar for cutting further any time soon and go one step further in that I believe another rate cut at this juncture would do more damage than good over time," Holt says.

His main argument is that cutting rates too aggressively now takes away the bank's options down the line. As he puts it, "you can't put the bullet back in the chamber after it has been fired."

Indeed, there's a growing view that's questioning whether a cut would even have the desired effect.

The bank cuts rates to stimulate investment and increase access to money, aiming to help growing businesses. But there's a lot of data to suggest that good businesses already have plenty of access to money. Official data shows corporate credit is growing by 8.7 per cent year over year — the fastest pace of growth since 2007. 

As CIBC economist Benjamin Tal put it, "If you need to borrow, you are already in the market, and another 25 basis points will do little to make or break a financing decision."

If helping out sectors hurt by the oil swoon is the goal, there's little evidence a rate cut would do that.

Helping the wrong people

"It's doubtful that lower rates will help Alberta in any meaningful way," Tal says, "And so far, the money that's borrowed goes largely to cash as opposed to investment and thus adds little to economic growth."

If there's one area that would really feel an injection of cash from a rate cut, it's housing. Homeowners tend to care a lot about their mortgage rates, but from a monetary policy perspective, they're a side effect.

And Tal argues that the only people who would really feel a rate cut are the ones we don't necessarily want to be encouraging.

"Rate cuts by the Bank of Canada are more effective at the higher end of the rate spectrum, where the sub-primers reside," he says.

"So any further cuts by the bank might fuel borrowing exactly where it's not needed."