National Post (National Edition)
Interest rate debate not over yet
ANOTHER CUT?
OT TAWA • With the ink barely dry on the last interest rate decision, many analysts are already pencilling in another cut by the Bank of Canada — if not this year, then early in 2016.
But a lot will depend on whether the economy pulls out of its half-year contraction. And that data — showing a 0.6-per-cent decline in the first quarter and likely 0.5 per cent in the second — could still be revised, either up or down, in the coming months.
Nevertheless, two consecutive quarterly declines in gross domestic product — fuelled by the implosion of oil prices — is really only the starting point for a so-called “technical recession.”
More talk of recession will need to be backed up by notable declines — unlikely at this point — in broad-based spending and employment levels, leaving forecasters to debate how that will transmit into future rate movements.
“I think the battle lines are pretty clearly drawn here,” said Douglas Porter, chief economist at BMO Capital Markets.
“There are those that think the bank may be still a bit optimistic and will need to cut again; and then others, like ourselves, who actually think they are being too cautious and are pretty certain that’s it for (rate cuts) this year.”
Bank governor Stephen Poloz, along with his policy council, should have enough time to assess Wednesday’s 25-basis-point cut to their trendsetting lending level, taking it to 0.50 per cent. That move followed a similar reduction in January, the first rate adjustment since late 2010.
The next policy meeting will be in September, at the end of end of the third quarter.
“I don’t think (that decision) is going to hang on one quarter, necessarily. It might be a combination of the third and the fourth quarter,” Porter said.
If that is the case, the Bank of Canada could find itself behind the curve with the U.S. Federal Reserve, which appears ready to begin raising its long-dormant key rate in September.
Despite “sharply downgrading growth,” the bank’s forecasts for this year of 1.1 per cent, from 1.9 per cent, and lowering 2016 output to 2.3 per cent, from 2.5 per cent, “still look too optimistic,” according to Bank of America Merrill Lynch’s North American economist.
“We expect the BoC to ease again, mostly likely in January 2016,” said Emanuella Enenajor.
She added the Bank of Canada’s Monetary Policy Report, released Wednesday at the same time as the rate decision, referred to a stronger-than-
I think the battle lines are pretty clearly drawn here
expected drag from the energy sector and “puzzling” weakness in exports.
“The MPR assumes that this puzzle somehow gets solved in 2016,” Enenajor said. “In our view, this is highly unlikely and sets the BoC up for disappointment, leaving the door open to another ease in early January.”
Even if the Canadian economy does rack up two quarterly declines, there are still huge differences between the previous recession and now.
First, the 2008-09 downturn lasted three quarters, not just two.
Most notably back then, though, was “the devastation in the job market,” said Porter. “Keep in mind, there were two separate months where we lost more than 100,000 jobs during that downturn.”
At the same time, “every indicator you could shake a stick at was hit hard. And it was right across the country and right across every industry. That was about as ‘ no doubt’ a recession as we’ve ever seen.”