There’s more room for loonie to decline, RBC warns

The Royal Bank of Canada expects the loonie to fall to US71.4 cents from about US74 cents by the end of year as the Bank of Canada’s interest rate continues to lag behind that of the U.S. Federal Reserve.

The Fed will most likely raise its interest rate 0.25 per cent this month and again in the fourth quarter to reflect a strengthening U.S. economy after years of monetary stimulus, said RBC senior economist Nathan Janzen.

Meanwhile, RBC expects the Bank of Canada to keep its rate frozen at an abnormally low 0.5 per cent for the rest of 2017, despite hawkish indications from the central bank’s senior deputy governor Carolyn Wilkins.

Though the central bank has acknowledged the Canadian economy “is doing better, (it) is also looking at wages and the inflation rate and seeing them both generally underperforming,” RBC deputy chief economist Dawn Desjardins said. “With NAFTA renegotiations and changes to the American corporate tax rate, that may present challenges to Canadian companies.”

She said the central bank is “not in the place to move the rate but, as we head into 2018 (should growth continue and trade stabilize), they will remove some of that stimulus that won’t be needed anymore.”

RBC expects the rate to freeze until 2018, when it will gradually rise to 1.25 per cent by year’s end.

Though RBC says it expects oil prices to rise, the rise won’t be fast enough to stop the loonie’s depreciation.

“As growth continues and, ideally, broadens further, (the Bank’s) governing council will be assessing whether all the considerable monetary policy stimulus presently in place is still required,” Wilkins said in a speech in Winnipeg.