The Bank of Canada is probably not ready to seriously consider cutting rates — yet

January 22, 2014

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn’t mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

Yes, economic growth is expected to be restrained over the next couple of quarters, the long-awaited pick up in exports and business investment still seems elusive and inflation continues to remain undesirably weak.

Even the last monthly jobs report, which tends to be volatile, was a bit of a shock, showing nearly 46,000 job losses during the month when every forecaster was expecting net hiring.

But an overheated housing market built on a mountain of household debt – one of the highest per capita in the world – doesn’t need more stimulus from even lower rates.

While some argue that parts of the housing market seem to be stabilizing after rocketing up in a straight line for more than a decade, other areas continue to exhibit worrying signs, particularly in the Toronto and Vancouver condo market.

Kevin Hebner and Van Le at JP Morgan wrote in a note:

Given existing housing froth, a serious discussion about cutting is probably off the table unless the finance minister announces yet another round of macro prudential tightening. Such an announcement is more likely than not during the next three months and would lead us to place a significantly higher probability on a rate cut.

Canada’s household debt-to-income ratio hit a record high in the third quarter of 2013. That’s another reason why the central bank will be wary of chopping rates and tempting households into taking on even more.

On the other hand, an acceleration in U.S. economic growth will allow the Federal Reserve room to continue tapering its monetary stimulus program and push the Canadian dollar even lower.

That, in turn, is expected to boost exports and could do the heavylifting for the BoC, offering yet another reason for the bank to wait instead of putting a rate cut on the horizon.


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