Rate cut more likely: Economists
With economy at risk, Poloz remains on dovish path
OTTAWA — A year ago this month, financial markets were shaken, and economists caught flat-footed, by a shock cut in the Bank of Canada’s key interest rate — the first adjustment in any direction in more than four years.
While many observers had already acknowledged the rout in global oil prices would hurt the economy, few appreciated at the time just how steep the collapse in growth would be, or how long it would linger.
Now, not many analysts would be surprised if central bank governor Stephen Poloz slashes borrowing costs again — this time, closer to the bone — after he and his policy council finalize their scheduled rate decision next week.
In other words, it appears the doves have come back to roost at the central bank.
And no one doubts Poloz’s willingness to do what needs to be done to accommodate them where needed.
Poloz proved that last Jan. 21, cutting the bank’s trendsetting lending level to 0.75 per cent from one per cent, the level that had been untouched since September 2010, in a bid to fire up spending coming out of the previous recession.
Poloz did it again on July 15, pushing the key rate down to 0.5 per cent.
But instead of getting better, the economy spiralled into another downturn in the first half of 2015 and looks precariously close to continuing that slide this year. Another 25-basis-point cut would leave the Bank of Canada around the same level where the U.S. Federal Reserve re-launched its policy rate in December — its first move up in almost 10 years — taking it to between 0.25 and 0.5 per cent, from zero to 0.25 per cent.
“We think the Bank of Canada will have to ease,” said Emanuella Enenajor, senior economist at Bank of America/ Merrill Lynch.
“They would be cutting to 25 basis points, which is the lower bound that they had in the last recession.
“At that point, if there’s not enough stimulus, then they could indeed engage in some sort of forward guidance — possibly later in 2016 — to influence expectations further out,” she said in an interview.
“Obviously, they have other tools like quantitative easing and negative rates they could be use further out.”
Enenajor is not alone in leaning toward a Bank of Canada rate cut next Wednesday.
In fact, over the past few days there has been a shift in views on the direction of the country’s monetary policy.
“As a placeholder we had no cut. But when we considered all the evidence, we decided ever so slightly to come down on the side of a cut,” said Douglas Porter, chief economist at BMO Capital Markets.
“Obviously, it’s just the nonstop decline in commodity prices makes it a very tough environment, and it does open the door to lower interest rates,” Porter told the Financial Post.
“The reality is that the bank won’t really decide until the next few days.
“And a lot of folks, like ourselves, want to take in as much information as we possibly can before making the call.”