TD economist says Bank of Canada not likely to reduce interest rates
OTTAWA — Bank of Canada Governor Stephen Poloz is often accused of sounding dovish — to keep the loonie in check — but that won’t lead to lower interest rates, says the TD Bank in a new analysis.
At a news conference last week, Poloz made headlines by referring to the “serial disappointment” of the global recovery, while downgrading Canada’s economic outlook once again, this time to 2.2-percent growth this year.
Markets reacted to Poloz’s cautionary words by clipping the wings of the loonie in an- ticipation that if the central bank wasn’t going to gut interest rates, it would at least keep the current 1-per-cent setting in the overnight rate in place longer than expected.
Given what’s happened in the economy during the first six months of 2014 — stalled jobs growth, 1.2-per-cent economic growth in first quarter in Canada, contraction in the U.S. — TD chief economist Craig Alexander said more monetary easing could be justified.
But, he added, it’s “highly unlikely” the bank will go in that direction and that markets are probably correct that the first rate hike for the fourth quarter of 2015.
That’s because the U.S. Federal Reserve is moving toward tightening, and a lower rate in Canada could encourage more borrowing in real estate. As well, inflation is perking up.
“One can debate whether the Bank of Canada will tighten monetary policy before, in tandem, or after the Fed,” said Alexander. “But one cannot debate that higher rates in the U.S. will also mean higher rates in Canada.”