The Bank of Canada might not be completed with interest-rate cuts at this time.
Seven of 19 economists in a Bloomberg survey predict the central bank will lower borrowing costs at some point in 2016, with the remainder forecasting it will remain on the sidelines. The next decision is March 9.
Although bond financial markets are pricing out the likelihood of more monetary stimulus, the divergence among forecasters highlights a number of uncertainties within the country’s economic story: The currency has depreciated dramatically over the past 2 yrs, but it’s unclear when the decline is sufficient to revive manufacturing. The us government is promising fiscal stimulus, however details are unavailable before the March 22 budget.
“A rate cut remains coming,” said Thomas Costerg, New York-based senior economist at Standard Chartered Plc, who had been the first one to call Canada’s slowdown this past year. He forecasts the benchmark rate is going to be cut to 0.25 percent in July, in the current 0.Five percent. “It’s very hard for Canada’s growth to consider off despite a weaker currency.”
Costerg joins economists at the Bank of Montreal, Capital Economics, Macquarie Capital, Citigroup Inc., HSBC Bank Canada and Laurentian Bank in predicting more stimulus from Bank of Canada Governor Stephen Poloz. It’s a view that assumes the impact of the oil shock will persist, and Canada’s non-energy exporters will continue to struggle.
It’s additionally a view increasingly at odds with bond markets, which are pricing out chances of additional monetary stimulus. Likelihood of a rate decline in 2016 fell to about 38 per cent on Friday, from double that in January, according to Bloomberg calculations on overnight index swaps. Poloz quashed rate-cut expectations at his last decision on Jan. 20, partly because he’s waiting to see information on the government’s fiscal plan.
A return to an easing mode – the Bank of Canada cut borrowing costs twice last year – would spell the end of the Canadian dollar’s recent recovery. Because the January rate decision, the dollar has gained 9.2 percent against its U.S. counterpart, which makes it the very best performer one of the world’s most- traded currencies. It had fallen 25 % in the two years just before that.
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U.S. Spreads
Yields on Canadian two-year bonds have almost doubled since January to 0.53 per cent Friday, narrowing spreads with equivalent-maturity U.S. debt to 35 basis points, from as high as 59 basis points. That tightening too is bound to reverse if Poloz cuts again, or fails to match any future rate hikes by the U.S. Fed.
Reasons cited for that Bank of Canada to stay around the sidelines incorporate a partial recovery in the cost of oil, among the country’s largest exports, and stabilization of worldwide financial markets. The new government under Pm Justin Trudeau is planning one of biggest one-year expansionary swings in fiscal policy in the nation’s history, hinting at deficits of approximately $30 billion this season. There’s also a growing sense in global policy making circles that central bank effectiveness is reaching its limit.
None of that is persuading skeptics like Costerg and Doug Porter at Bank of Montreal. For one, the recent gains in the dollar should be a brand new concern for Poloz given the need for export development in his rebound story. The central bank governor in January cited the risks from the rapid depreciation of the currency as among the causes of not cutting interest rates at the time.
“Suffice it to say the currency isn’t any break around the Bank of Canada anymore,” said Porter, chief economist at BMO Capital Markets, that is alone among the country’s top 5 banks forecasting a cut this year.
Investment within the nation’s oil industry will continue to be a drag on growth, even if prices recover, said Costerg, who first cut his forecasts for that Canadian economy in January 2015, 6 months before most of his peers adjusted, around the back of worries about the Canadian crude sector. He has been pessimistic about Canada’s prospects since.
‘Did Math’
“We just did the math,” Costerg said of his forecasts this past year. “We had the view that the drop in oil prices was a big shock to the economy because of the size the energy sector.”
David Doyle at Macquarie Capital, which predicts the Canadian dollar will fall to a record low of 59 U.S. cents next year, cites three logic behind why he thinks the Bank of Canada is simply too optimistic and will likely cut rates: exports probably won’t recover as robustly as expected, rising import inflation will eat into consumer budgets and government spending is unlikely to have the hoped-for impact, partly on delays getting money out of the door.
“We still think that the Bank of Canada and consensus growth forecasts for that domestic economy are extremely optimistic,” Doyle said in a phone interview. “We believe many people have grown to be more constructive around the outlook based on a couple of things which there isn’t much evidence occurring yet, the very first being a get in export activity.”
Other regions of concern include stretched home valuations and worries the oil shock could spill over into consumption, a place of strength for Canada. There are also doubts about the country’s capability to take advantage of a weaker dollar. The close correlation between the currency and manufacturing doesn’t appear to mean around it has previously, possibly suggesting deeper issues for that Canadian economy with the emergence of stiffer competition from countries like Mexico.
David Watt, chief economist at HSBC Bank Canada, believes it’s too soon to give up on monetary policy. “Too much is being put on fiscal policy,” said Toronto-based Watt. “We still a mixture of fiscal and monetary.”
Bloomberg News
