Will history repeat itself when the Bank of Canada makes its latest overnight rate announcement on Wednesday?
It depends whom you ask.
A year ago this week, the central bank cut its key lending rate by 25 basis points, the first of two cuts in 2015 that brought the rate — which influences mortgage interest rates — down to 0.5 per cent, and ahead of the central bank’s next big reveal, each of Canada’s five biggest banks released outlook statements.
Here’s what they said.
A cut, though not recommended, is in the cards: CIBC
“We see slightly greater odds of a rate cut next week than the other alternative, a dovish statement with a promise of action if needed down the road,” Avery Shenfeld, CIBC Economics’ chief economist, wrote in a report Friday.
Shenfeld noted it’s “a close very close call.” However, despite predicting just the opposite, CIBC suggests maintaining the rate for now, providing wiggle room for a rate cut later on if needed, he added.
If the Bank of Canada cuts the rate this week like Shenfeld expects, it would be jumping the gun: “After an additional rate cut, it might be hard to suppress talk of negative rates and (quantitative easing) ahead.”
Even lower oil prices a likely catalyst for a cut: BMO
BMO economists Douglas Porter and Benjamin Reitzes consider a rate cut (they call for 25 basis points) spurred by the further dip in oil prices to be the most likely outcome on Wednesday. And if it doesn’t happen this week, then it will by March or April — though they recommend against it.
A further cut to the key lending rate will work against mortgage rule changes geared towards tempering overheated housing markets in Toronto and Vancouver set to take effect next month, they said Friday in a report.
It could also result in an even lower Canadian dollar, leading to costlier imports and higher price tags for consumers. And that’s not all. “If Bank policy ties itself too slavishly to oil prices (and broader financial markets), how should it respond if by chance oil prices manage to rebound later this year?”
No cut (at least not yet), says Scotiabank
“We don’t think the (Bank of Canada) should cut this time. We don’t think it will cut — yet,” wrote Derek Holt, Scotiabank’s Vice President Economics, in a note Friday. “Few can say they have high conviction,” he continued.
In line with BMO’s analysis, Holt cited the fallout of a rate cut for unbalanced housing markets and import prices as reasons for the Bank of Canada to stay the course. “It’s not the least bit clear that the benefits outweigh the costs,” said Holt.
“Next week’s decision is best positioned as just a further micro-step along the path to a bigger multi-year series of adjustments for the Canadian economy that should make the BoC wary of over-reacting to the nearest of near-term developments,” he cautioned.
Stronger exports to keep Bank from lowering rate: RBC
One plus to the lower Canadian dollar is that it encourages the Canada’s exports as US importers capitalize on the exchange rate, boosting our economy in the process. That’s why RBC is predicting the Bank of Canada won’t adjust the key interest rate.
“Our current forecast assumes that sufficient strength in exports will… keep the economy expanding and overnight rate unchanged at 0.50% during 2016,” Laura Cooper, an RBC economist, said in an economic update early last week.
TD Bank on the fence
TD Economics provided cagiest from the five big banks last week, with no direct prediction given. “A case exists for a rate-cut at the January 20th meeting,” writes Beata Caranci, TD Economics’ VP and chief economist.
Caranci cited still worsening conditions for the energy sector and the impacts of economic uncertainty in markets, such as China, as main factors.
Should the Bank of Canada maintain the key lending rate this week, Caranci said the forecasts that the quarterly Monetary Policy Report — which will be released alongside the interest rate announcement — includes will give an idea of how the bank intends to continue later into 2016. “A rate cut down the road remains entirely plausible,” said Caranci.