Poloz’s rate choices: Hold, cut or hike?
Enough with the suspense. Let’s just get this month’s upcoming interest rate decision out of the way now.
We could ask the Bank of Canada whether its policymakers are going to hold, cut or hike rates. But they won’t tell us. They’re not allowed.
Still, with an economy flirting with another recession six years after the previous one, Canadians can’t help but wonder what the next move will be.
So, instead, the Financial Post has created its own governing council — of sorts — to provide a mirror policy gauge for the real rate decision on July 15. We asked top economists to sit in for the BoC’s team and tell us what they would say around the table with governor Stephen Poloz, and how any Fed move might affect their decisions.
The bank’s key rate is now at 0.75 per cent, following a surprise 25-basis-point cut in January after being untouched since September 2010.
Emanuella Enenajor, senior economist, BofA Merrill Lynch
“HOLD” An ease in July may be reasonable, given how poorly the economy has performed. But all this time, we have argued that the oil shock is hard to measure, and only in the second half of this year will we see signs of a recovery.
I would vote to hold off on any easing — it’s consistent with our existing narrative that the real test for policy comes later this year. Also, it would be less jarring after so many months of pounding our fist on the table that the economy is fundamentally improving. We wouldn’t want to seem too trigger-happy, cutting primarily in response to one weak GDP print.
For now, we should clearly communicate that growth has been disappointing, and if activity doesn’t substantially improve later this year as we expect, then we’ll need to act.
Dawn Desjardins, assistant chief economist, RBC
“HOLD” The rationale for holding the policy rate steady stems from the assessment that the biggest weight on economic growth so far this year has come from the energy sector, which was expected given the magnitude of the drop in oil prices. Service sector output is running 2.4 per cent above year ago levels, bang on the average of the past decade. The labour market generated 102,000 more jobs and wage growth is showing signs of accelerating. With gasoline prices still well below year ago levels, consumers are in good position to increase spending. It is worth noting that although consumer spending did not grow quickly in the first quarter, recent data is consistent with a faster pace of consumption in the current quarter.
Housing sales were very strong in April and May. The danger here is that a further easing in monetary policy will stoke an already very hot area of the economy.
Douglas Porter, chief economist, BMO Capital Markets
“HOLD” I would still push for a “on hold” vote at this meeting, but definitely leave the door wide open for the possibility of another cut as early as September.
My reasons for not cutting yet: Non-resource portion of the economy is still grinding along, auto and home sales strong, and employment is holding up O. K.— at least based on data to May. While it may be a “side effect,” household borrowing is too strong to justify further rate cuts. Core inflation remains stubbornly above two per cent, even if central bank’s corecore says it’s below two per cent.
If the Greece crisis deepens and it looks like Fed is going to stay on hold for much longer, then another 25-basis-point trim may indeed make sense in the following meeting.
Charles St-Arnaud, economist, Nomura Securities
“CUT” The policy rate should be cut by 25 basis points at the July meeting because the economy has been significantly under-performing expectations. The weaker-thanexpected growth in Q1 and so far in Q2 means that the output gap is wider than expected. Moreover, there is little sign of a pickup in non-energy exports, suggesting that the weakness could continue.
The timing of the Fed rate hike has little impact on my view for rates in Canada. We have to take into account the very asymmetric nature of the shock. Lower oil was a clear negative for the Canadian economy, while it was at worst neutral on the U.S. economy.
Avery Shenfeld, chief economist, CIBC World Markets
“CUT” At this point, I would favour a cut, in part because if it proves unnecessary, it could always be reversed later this year. A rate cut doesn’t have to come with a gloomy announcement of what lies ahead that might sap sentiment, because it could be simply “blamed” on the weaker data we’ve already seen.
Floating rates would likely not fall by a full quarter point, but the resulting weakening the Canadian dollar would be supportive for exports, and right now, it looks like we need that extra bump. Prospects for a Fed hike later this year don’t rule out a different direction here, just as the Bank of Canada hike in 2010 when the Fed was still easing.