Photo: James Paolo
Though the Bank of Canada surprised the finance community by cutting the already historically low key interest rate to 0.75 per cent in January, the possibility of a further cut is still in the cards. Governor Stephen Poloz will make the interest rate announcement on Wednesday and whether it will will lowered further or hold steady is, in the words of the Bank of Montreal’s Chief Economist Douglas Porter, a “toss up.”
Last week, the big banks appeared slightly more confident in a further reduction in the overnight lending rate. After news broke that Canada’s April GDP shrank unexpectedly, many market-watchers speculated that Poloz would make the cut.
“Indeed, the unexpected contraction introduces the possibility that Canada fell into a technical recession in the first half of 2015,” wrote Benjamin Reitzes, Senior Economist at the Bank of Montreal (BMO) in a financial digest published July 3rd.
“Even a modestly more upbeat outlook may not be enough to keep the Bank of Canada from easing.”
In a CIBC Economics report published for the week of July 6th, economists expressed doubt over what lowering rates further would achieve: “The market is now attaching a 50 per cent probability of another cut on July 15th. But can the Bank of Canada really save the day? With rates already so low, one must question the effectiveness of another rate cut.”
Because so much of the country’s economic pain is tied to the oil patch in Alberta, CIBC showed skepticism that a further drop would help the province “in any meaningful way.”
On July 6th, TD Economics published a report titled, “Canadian recession likely to drive another Bank of Canada rate cut.”
“The economy is tracking well below the 1.9 per cent pace expected by the Bank of Canada in its April 2015 Monetary Policy Report,” noted Randall Bartlett, Senior Economist at TD.
“In the absence of another interest rate cut, this means it could take a year longer than the Bank of Canada expected for the Canadian economy to return to its trend level of output. With this in mind, the balance of probabilities has tipped in favour of another quarter-point rate cut at the Bank’s next interest rate announcement on July 15th.”
Scotiabank also waded into the topic in a report published on July 9th, stating that Bank of Canada won’t cut rates as the country is “not in recession in any meaningful or broadly defined way.” They blame Canadian data, which tends to lag behind US data in areas such as trade, resources and energy. The data is then inferred because it typically isn’t available on a timely basis. In other words, much of the data that the Bank of Canada bases its decisions on is “stale” in the eyes of Scotiabank. Because the economy was shaky earlier on in the year doesn’t necessarily mean it will remain that way in the near future.
Economist Derek Holt at Scotiabank ultimately suggested that another cut could cause problems, especially for the housing market.
“If cuts further inflame housing, then when we eventually enter the potential soft patch of weakened housing demand it may prove to be very difficult to hike. Giving away cuts now could mean courting more extreme monetary policy action later and with debatable success in a market like Canada especially if the Fed is going the other way,” he wrote.
Interestingly, even some of the major real estate companies in the country believe slashing rates further could have drawbacks. In Royal LePage’s second quarter report, the company stated another cut “could over-stimulate markets such as greater Toronto and Vancouver.”
New employment data released Friday further complicated predictions as it was neither dire nor unequivocally positive. Canadian employment fell by 6,400 in June, but the country did manage to gain 64,800 full-time jobs in the month. The unemployment rate was 6.8 per cent, down from 7 per cent the year before. Economist Douglas Porter noted said the jobs figures do “little to advance the cause for rate cuts.”