One interest rate cut this month is not enough to pick up the ‘slack’ growing in Canada’s labour market, according to TD bank’s director and senior economist, Andrew Hencic.
“We’ve held the view that two cuts was the way to go,” Hencic told BNN Bloomberg in a Friday interview.
Last week, The Bank of Canada dropped its key policy rate for the first time since March by 25 basis points to 2.5 per cent, citing a weak job market.
The central bank said if the economy continues to face risks in the coming months, it will be ready to make another cut.
Hencic said the next rate cut should be in October, and should be in the lower end of the two per cent target range to address Canada’s lingering economic weakness and low business investments that have been exacerbated by the trade war.
He said Canada’s inflation has already shown significant signs of slowing down in the last three months with rates already dropping closer to the lower end of the two per cent range.
“We still see that labour market stock is likely to accumulate through the back end of the year, which would take further pressure off prices,” said Hencic.
“That kind of reinforces our view that delivering another cut isn’t going to carry that much risk.”
Rate cuts ineffective in trade war
Hencic agrees that interest rate cuts are not the best tool when dealing with the tariffs imposed on Canadian goods by the U.S.
“The disruptions of tariffs are basically another supply shock,” said Hencic, comparing the situation to the economic disruption in 2022 where the war in Ukraine stressed global supply chains.
With the ongoing trade war, he said, the federal government was able to reduce the economic supply shock it faced when it removed many of the retaliatory tariffs against the U.S. But now, the demand in the economy is suffering.
“That’s where the interest rates can play in, where they can kind of boost domestic demand,” said Hencic.
“On the supply side, that really hinges on how the federal government’s going to navigate negotiations with our American counterparts, and what kinds of new investments they can unlock and new trade relationships globally they can look to develop.”
Averting a potential technical recession
Hencic says he forecasts a one per cent annualized growth in the third quarter, avoiding a technical recession, which is defined as two consecutive quarters of negative GDP growth.
“Part of that is reflective of the fact that consumers are spending a little bit better than we thought they would,” said Hencic.
He says this year’s second quarter saw a pop of vehicle sales that really helped lift the economy. He also said last year’s third and fourth quarter also showed very strong consumption growth.
“Obviously, with the tariffs and the rhetoric in the trade relationship, things got dented a bit,” said Hencic.
