Poloz cuts rates as economy heads south
Policy-makers forecast growth in third quarter
OTTAWA — It was widely predicted, and now the Bank of Canada has joined private-sector analysts in acknowledging the economy likely slipped into recession in the first half of 2015 — something that hasn’t happened, technically at least, in six years.
So, with no rebound in sight for oil prices and growing concerns that global economic threats could spill over into this country — governor Stephen Poloz cut the central bank’s trendsetting interest rate for the second time this year.
While the 25-basis-point drop to 0.5 per cent on Wednesday was also anticipated by many forecasters, the previous cut by the same amount, in January, shocked markets — coming with little indication and after nearly five years of dormant rate levels.
Even so, the collapse in oil prices had already started taking its toll on Canadian output in the first quarter, where the governor had hoped it would be contained, or “front-loaded,” as he said at the time.
Now into a second quarter of contraction, Poloz was still careful not to use the R-word on Wednesday.
But he expressed strong concerns over the growing impact of low crude prices on business investment in the energy sector — as well as signs of reduced spending by non-resources-based companies and weaker demand for Canadian products in China’s slowing economy.
Speaking after the of the bank’s quarterly Monetary Policy Report, released along with the rate decision, Poloz said “global economic developments have been quite disappointing, and these have led to a significant downgrade of our estimate of Canadian economic growth for 2015.”
In its report, the central bank said the economy likely contracted by 0.6 per cent from January to March and by 0.5 per cent between April and June, meeting the technical definition of a recession: two consecutive negative quarters.
“The facts have changed — quite quickly actually — in the last two to three months,” Poloz told reporters in Ottawa.
“One of the big shocks in this outlook is the downgrade of investment intentions by the companies in the oilpatch.”
Nevertheless, policy- makers are forecasting 1.5-per-cent growth in the third quarter and 2.5-per-cent expansion in the last quarter of 2015. “It’s going to take some really wicked downside surprise in the economy now to seriously shock the bank, given that they’re now the most cautious forecaster,” said Douglas Porter, chief economist at BMO Capital Markets.
“We think auto production is poised to come back after a pretty tough first half. And we also don’t think there will be quite the negative hit from the oil sector that there was in the first half of the year,” he said.
“So, the way I read (Wednesday’s) events is that’s probably it for rate cuts this year.”
For now, the Bank of Canada maintains additional monetary stimulus “is required at this time to help return the economy to full capacity and inflation sustainable to target.”
Policy-makers have pushed back their target for closing Canada’s output gap — the difference between estimated full capacity of the economy and actual output — to the first half of 2017 from the previous forecast of “around the end of 2016.”
That matches the adjusted time frame for reaching the bank’s overall inflation target of two per cent — the midway point of policy-makers’ com- fort band of between one and three per cent for the annual rate of the consumer price index.
With the help of a weaker Canadian dollar, Poloz and his policy team are hoping the non-resource track will expand and begin to lead growth in this country.
That should also lift exports to the U.S., helping to strengthen business confidence and investment — two elements that have been slow to recover after the 2008-09 recession — while household spending, which has led growth after the downturn, is expected to keep rising.
“It’s almost, to some extent, a hope-and-prayer approach at this point, because moving 25 basis points lower, from the domestic economy standpoint, we can hope to see a boost,” said Scott Smith, senior market analyst at Cambridge Global Payments in Calgary, dealing with foreign exchange risk management.
“But whether or not the (commercial) banks flow that through to the domestic consumer is another thing. Even in that regard too, we’ve got the worries of it further exacerbating household imbalances that we’re seeing from consumer debt levels.”
As well, like Canada, the U.S. economy saw weak growth in the first part of 2015, which was blamed on severe winter weather and labour disruptions at West Coast port facilities.
The U.S., Canada’s biggest trading partner, is forecast to expand 2.3 per cent this year, down from the previous forecast of 2.7 per cent, after growing 2.4 per cent in 2014.
“THE FACTS HAVE CHANGED — QUITE QUICKLY ACTUALLY — IN THE LAST TWO TO THREE MONTHS,.”
STEPHEN POLOZ