BoC can't cut rates, cannot keep rising either amid 'huge' economic downside risk: Strategist
Ahead of the Bank of Canada’s next interest rate decision, one chief market strategist said he expects the central bank to hold rates while acknowledging current risks in the economy.
Canada’s central bank is set to announce its next policy rate decision on Wednesday. Karl Schamotta, a chief market strategist at Corpay, said in an interview with BNN Bloomberg Monday, that he thinks the Bank of Canada will acknowledge downside economic risks stemming from volatility in the U.S. banking sector.
“I don't think anyone on the Street is expecting a hike or really any adjustment here. We are expecting a hold but also a relatively hawkish bias in the accompanying statement,” Schamotta, said.
Schamotta said he also expects the central bank to also recognize “signs of resilience in the economy,” which he said has grown more rapidly than projections from the Bank of Canada. He said gains in employment have spurred increases in aggregate spending.
“The Bank of Canada is, unfortunately to a very large degree, sort of pinned between a rock and a hard place at this point. They can't respond to the data by cutting rates, but at the same time, they can't continue hiking because they are aware that there are huge downside risks ahead for the Canadian economy,” Schamotta said.
Schamotta said he expects a future decline in consumer spending, which is likely to weigh on the Canadian economy and bring about negative growth. He said that following outsized increases to interest rates, Canadian consumers will likely curtail spending as they deal with higher debt loads.
Canada’s central bank increased interest rates eight times last year, before electing to hold its policy rate at 4.5 per cent in March.
An economic downturn is not likely to turn into a “precipitous slide” given the strength in the labour market and robust global demand, said Schamotta.
“At the end of the day, it's shocking that the Canadian economy has not slowed more dramatically than it has [and] that employment is as robust as it is,” he said.
“It really seems to me that the lagging impact of last year's tightening cycle should be hitting home, that consumers should be shifting spending patterns, but we're just not seeing it yet.”
Schamotta said he expects consumers to begin shifting their spending patterns in the “coming months.”
Additionally, he said he does not anticipate a rate cut from any major central bank this year.