Poloz expected to set the stage for 'prolonged pause' Wednesday
Bank of Canada Governor Stephen Poloz is widely expected to cement expectations for a prolonged pause on interest rates on Wednesday, as the nation’s economy grapples with a slowdown.
All 24 analysts surveyed by Bloomberg see policy makers leaving the benchmark overnight rate at 1.75 per cent in a decision at 10 a.m. in Ottawa. It would mark a fourth straight hold by the Ottawa-based central bank.
The more important question is whether a run of disappointing Canadian economic data, coupled with slowing global growth and concerns about a U.S.-China trade war, prompts Poloz to formally put an end to his rate hiking cycle, after five increases since the middle of 2017. Even amid all the recent concern, Poloz has been reluctant to fully abandon the idea that his next step is likely higher -- making him a bit of an outlier.
“The Bank of Canada is still one of the most hawkish central banks globally, and I expect Governor Poloz is going to want to maintain some optionality” to raise rates, according to Frances Donald, head of macroeconomic strategy at Manulife Asset Management LLC. “Full capitulation like we’ve seen from the Federal Reserve or the European Central Bank in my view is unlikely,” she said.
The case for a prolonged pause has grown significantly in the months since Poloz last raised borrowing costs in October. Canada’s economy stalled in the final quarter of last year, as oil prices tumbled and households reined in spending. Data for the early months of 2019 continue to be sluggish at best.
The end result is an economy that is probably operating with more slack than the Bank of Canada anticipated when it last released its quarterly forecasts in January. That’s one of the reasons swaps trading suggests investors are more likely to be betting on a Bank of Canada rate cut over the next year, rather than a hike.
Yet, there are also good reasons why Canada’s central bank may want to maintain a modest tightening bias. Given the country’s status as a high-debt nation, for example, Poloz may want to keep the prospect of higher rates alive to prevent another borrowing binge, according to Donald.
“Unlike the U.S., the Bank of Canada may be looking to continue a gentle deleveraging,” the Manulife economist said.
Poloz has also been skeptical about the merits of fine-tuning policy on the back of limited data, and may have an aversion to a complete shift in stance until the economic case becomes overwhelming. And there’s no indication that’s happened, with oil prices recovering and amid signs that China and the U.S. are edging closer to an end to their trade war.
Throughout the recent downturn, the central bank has stuck to its expectations of a rebound from the current soft patch.
At the same time, the Bank of Canada has been hedging. Its officials have spent the last few months diluting their conviction on higher rates, taking an incrementally more dovish stance in each of its past three rate statements while being careful not to entrench persistent market bets for a cut.
Until recently, the idea has been to inject ambiguity into the timing of rate hikes, while sticking to an overall belief the next move will be up. But in recent weeks, Poloz has also stopped talking about higher rates altogether, raising speculation he’s planning to formally drop the hiking bias.
This “week should see the last vestiges of a tightening bias dropped by the Bank of Canada in its rate statement,” Mark Chandler, head of fixed income research at Royal Bank of Canada, said in a note to investors.
Asked at a press briefing April 13 in Washington whether he’s done with hiking, Poloz said: “That’s a very data dependent question.” He also dismissed the idea the central bank has any specific target for borrowing costs in the long term, and played down the significance of the Bank of Canada’s recent references to the “neutral” rate in its statements.
The neutral rate estimates the final resting place for borrowing costs. It’s currently forecast between 2.5 per cent and 3.5 per cent, which is above the policy rate. The Bank of Canada’s decision to include the concept in its rate statements late last year was read as a nod to rate hike plans.
As part of Wednesday’s quarterly monetary policy report, however, the Bank of Canada may revise down the estimate for neutral, implying current policy is tighter than previously assumed and giving Poloz one more reason to pause.
--With assistance from Erik Hertzberg