Headline jobs number hides reality of 'sluggish' economy: CIBC's Mendes
The Bank of Canada will likely cut interest rates in the second quarter of next year, according to an updated forecast from the Canadian Imperial Bank of Commerce.
CIBC said they see the U.S. Federal Reserve cutting rates 25 basis points by the end of this year, and the Bank of Canada will follow suit in 2020, according to senior economist Royce Mendes and head of North American rates strategy Ian Pollick who both co-authored the report.
Mendes said higher interest rates have had a negative impact on the Canadian economy with evidence showing up in recent data points such as durable goods orders.
"I think that's why we're so at odds with the Bank of Canada when the governor keeps coming out and saying rates are still clearly stimulative in this country just because they're below the pace of inflation," Mendes said in an interview with BNN Bloomberg.
He added any reversal in interest rates, at least in the near term, would be met with reluctance from the Canadian central bank because Governor Stephen Poloz has been "married" to the idea that rates eventually need to rise in Canada.
“That’s likely to leave the Bank of Canada reluctantly joining the rate-cutting party in 2020,” Mendes and Head of North American Rates Strategy Ian Pollick wrote in a note to clients on Friday.
The research note cites the recent addition of U.S. tariffs of Chinese goods and the Trump administration’s threat of escalating levies on imports from Mexico, which are set to take effect Monday, as reasons for the change in their forecast.
"That will filter into the Canadian economy. Eventually, I think the Bank of Canada is going to be forced to cut rates in 2020. I think that will be the next move in rates. It's unlikely to be a move higher," Mendes said.
Earlier this week, U.S. Fed Chair Jerome Powell signaled openness to a rate cuts if trade tensions persist. Meanwhile, the Bank of Canada struck an optimistic tone in its latest rate decision last month when it held rates steady at 1.75 per cent, citing factors such as a stabilizing national housing market, stronger consumer spending, employment gains, and recovery in the oil sector.