BOC to hold this year? Probably not say nearly half the primary dealers

April 15, 2015

Bank of Canada Governor Poloz speaks during a Canada-UK Chamber of Commerce event in central LondonThe Bank of Canada will almost certainly hold policy steady on Wednesday but nearly half of the banks who do business directly with it predict at least one more rate cut this year.

But just what another 25 basis point cut, over and above a similar unexpected easing in January, will achieve is unclear.

BofAML, Casgrain, HSBC, Laurentian Securities and Scotiabank are the primary dealers predicting the economy will remain weak enough and inflation sufficiently low to warrant another rate cut.

In contrast, the wider consensus is for rates to move up 25 basis points to 1.00 percent – but not until the third quarter of 2016.

Back in January when Governor Stephen Poloz cut the lending rate, he said it would act as an “insurance” against plummeting oil prices, which had sunk 60 percent between June and then.

While global crude oil prices have recovered a little this year, the outlook is still tepid. Brent crude will likely average $60 in the third quarter, close to Wednesday’s $59.34, a recent Reuters poll showed.

And while Poloz has gone as far as saying the economic consequence from the oil shock could be “atrocious”, the full impact of lower crude prices, Canada’s biggest export, is yet to be felt in the economy.

That is perhaps why forecasters predict Canada’s economic growth in the first quarter will fall shy of the BoC’s original 1.5 percent annualized rate prediction.

Calling for a rate cut as early as Wednesday, HSBC wrote in a report:

With GDP growth anticipated to be even further below potential, and with a higher degree of labour market slack, we see downside risks to the inflation outlook.

BofAML’s Canada and U.S. Economist Emanuella Enenajor, however, says the central bank is “a bit too optimistic” that growth will pick up later this year.

If you get into the latter part of this year, you will realize the drag from weaker oil prices has been persistent and manufacturing rebound is falling short.

A recent Bank of Canada business survey showed the negative impact of lower oil prices was spilling to other sectors of the economy.

Factory sales shrunk 1.7 percent in January, the third decline in four months and much more than the median predicted in a Reuters poll, despite a weaker Canadian dollar.

And Canada’s overheated housing market, the mainstay of the economy during the financial crisis, is dangerously close to a crash.

Even if the BoC cuts rates to boost the economy, that only raises the risk of over-indebted households borrowing more and busting the market.

Enenajor added:

What we really need to see is a massive, much stronger depreciation in the currency. We need to see the Fed hike while the Bank of Canada eases. That would certainly help weaken the Canadian dollar.
But I think confidence is something that is lacking and that’s not something the Bank of Canada can change by altering short term rates.
The U.S. economy also needs to strengthen notably. Monetary policy is not the be-all and end-all. It is not the panacea for this issue.

 

(with additional inputs by Anu Bararia)

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