Interest rates unlikely to change, TD predicts
More easing by Bank of Canada improbable despite inflation threat
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-per-cent growth this year.
Markets reacted to Poloz’s cautionary words by clipping the wings of the loonie in anticipation that if the central bank wasn’t going to gut interest rates, it would at least keep the current one 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 the 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 in pencilling in the first rate hike for the fourth quarter of 2015, or about 15 months from now.
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, even if the bank doesn’t yet see it as a problem.
“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.”
The Bank of Canada’s overnight rate has been set at one per cent since September, 2010.
David Madani of Capital Economics has been among the vocal private sector analysts suggesting that Poloz should consider cutting rates, but he has also said the most likely outcome is that rates will stay unchanged for a longer term.
Most analysts, however ,believe it would require a major economic shock, such as another recession, for the Bank of Canada to ease rates further, in part because borrowing costs are already at or near historic lows.
The unofficial C.D. Howe monetary policy council is recommending the overnight rate be jacked up by threequarters of a point to 1.75 per cent by next July.
Alexander says when rates do start heading north, the central bank will likely do so in slow and incremental steps, until it reaches a normal or neutral position.