Trade deficit prompts more economists to back rate cut
OTTAWA— Bank of Montreal’s Doug Porter and Royal Bank of Canada’s Mark Chandler joined a growing list of economists calling for Canada’s central bank to cut interest rates next week on signs of a faltering recovery.
Porter and Chandler predicted Wednesday the Bank of Canada will reduce its overnight rate to 0.5 per cent at the next decision July 15.
They changed their predictions after a report Tuesday showed a drop in non-energy exports pushed Canada’s trade deficit to the second-largest on record.
“We are seeing persistent disappointments,” Porter said by phone from Toronto. “I’m not sure anybody was calling for non-energy exports to go into reverse.”
Bank of Canada governor Stephen Poloz is counting on a rebound in shipments of goods such as automobiles and metals to revive growth after the shock of lower oil prices shrank the economy in the first quarter. Recent reports suggest the damage is lingering, with data showing gross domestic product unexpectedly contracted in April for a fourth straight month and building permits dropped in May.
Seven of 24 economists surveyed by Bloomberg News forecast a cut. Scotiabank is alone among the five largest Canadian banks to predict Poloz will stay at 0.75 per cent.
Asked about some of his peers who have said a recession took place in the first half of the year, Porter said that is “debating history.”
Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, said the failure of exports to lead growth led him to change his prediction, adding Tuesday’s trade report was the clincher. “There are some tentative signs of the rotation story but to me it’s not strong enough.”
The central bank and private economists said this year a decline in the Canadian dollar and a recovery in the U.S. would boost exports.
Exports fell for a fifth straight month in May and Canada’s year-todate trade deficit is the largest on record, Statistics Canada said.