Why it’s not time for a rate cut from BoC

Canada is heading toward a recession based on the official data, so calls are growing louder for another interest rate cut from the BankofCanada.

The economy needs to grow at a rate of 0.2 per cent in May and 0.3 per cent in June in order to achieve zero growth for the quarter. But a technical recession is looking more and more likely with forest fires in Alberta expected to have a negative impact on growth there.

As a result, the market pegs the odds of a rate cut on July 15 at 50 per cent.

But CIBC economist Benjamin Tal doubts the effectiveness of another move to ease policy by Canada’s central bank given that rates are already extremely low.

Commercial banks didn’t fall in line when the Bank of Canada surprised markets by cutting rates in January, and the same thing may happen this time around, with only a part of the central bank’s rate cut reflected in prime borrowing costs.

“Furthermore, the pain is very narrowly based, and it’s doubtful that lower rates will help Alberta in any meaningful way,” Tal said.

A rate cut should support the economy, but corporate credit is already rising at its strongest pace since 2007 (8.7 per cent), and those who need to borrow are already doing so. As the economist points out, another 25 basis points will do little to make or break a financing decision, and much of that borrowing is still going to cash.

Similarly, another cut is unlikely to spark a surge in borrowing by a generation of Canadians who have never experienced high or rising rates.

Tal noted that rate cuts by the BoC are more effective at the higher end of the spectrum, home and sub-prime borrowers. “So any further cuts by the Bank might fuel borrowing exactly where it’s not needed,” he said.

That leaves the Canadian dollar as potentially the only beneficiary of a rate cut, with Tal expecting the loonie to weaken by a cent or two in that event — again, not a game changer based on recent experience.

That’s why monetary policy may already be as loose as it can be, and why fiscal policy may be the medicine the Canadian economy needs.