CALL FOR RATE DROP
Credit Suisse joins chorus
Forecasts for a Bank of Canada interest-rate cut this year are building. Credit Suisse Group AG joined Citigroup Inc. and HSBC Holdings Plc in forecasting easier monetary policy, possibly next month, amid sluggish Canadian growth and slower-than-expected inflation. The Swiss bank has pencilled in a quarter-point cut to the central bank’s 0.5 per cent overnight target rate and cut its forecasts for the Canadian currency.
The possibility of a rate cut started to creep up after the BoC said on Sept. 7 that risks to inflation had “tilted somewhat to the downside.” That shift was ratified by data last week showing Canada’s inflation rate fell to a 10-month low in August, trailing even the lowest forecast in a Bloomberg survey.
“The language in the recent statement and in recent interviews suggests they might be preparing for a possibility of a rate cut,” Alvise Marino, a foreign-exchange strategist at Credit Suisse in New York, said by phone Wednesday. “Now the data needs to support that, and so far, since that latest development, data has been on the dovish side, inflation in particular.”
Still, a median of economists surveyed by Bloomberg see the BoC staying on hold this year and through much of 2017. Traders agree. The likelihood of a BoC rate cut by year end was at 18 per cent on Thursday, up from 10 per cent at the beginning of September, according to Bloomberg data based on overnight index swaps. The bank’s next announcement is on Oct. 19.
Credit Suisse expects the Canadian dollar to weaken to $1.35 per U.S. dollar in the next three months, compared with its previous forecast of $1.32. It also sees the loonie trading at $1.35 in a year from now, against its previous call of $1.34. The currency is expected to weaken to $1.32 by the end of the year, according to forecasts compiled by Bloomberg.
David Watt, chief economist at HSBC Bank Canada, who admits his call for an October cut is aggressive, said he’s “unconvinced of the underlying trends in the Canadian economy.”
Canada’s main inflation rate decelerated to 1.1 per cent in August from 1.3 per cent in the month prior, while core inflation, which measures consumer prices excluding eight volatile items, slowed to a two-year low of 1.8 per cent from July’s 2.1 per cent, Statistics Canada said. Both readings lagged the lowest forecasts in Bloomberg economist surveys, and analysts predicted overall prices would accelerate on the month. Government bonds rallied in response with the yield on 10-year notes touching 0.95 per cent on Wednesday, the lowest since July.
“The slowdown in inflation was surprising. And that really, really got the market nervous again,” said Brian D’Costa, a co-founder of a Toronto-based hedge fund Algonquin Capital Corp.