Questioning the efficiency of rate cuts: John Zechner
Most economists aren’t budging in their prediction Bank of Canada Governor Stephen Poloz will hold interest rates steady for at least another year.
Even with renewed speculation about an impending global recession and a trend among the world’s central banks toward easing policy, a Bloomberg survey shows a majority of economists still expect Poloz to keep the benchmark overnight rate at 1.75 per cent until the end of 2020. That’s counter to the expectation of markets, where forward rates point to some easing over the same period.
The surprising robustness of the domestic economy may be keeping the bulk of analysts in the more hawkish camp. As global trade uncertainty mounts, key Canadian indicators continue to beat expectations -- including back-to-back trade surpluses -- with growth in the second quarter tracking faster-than-expected.
“Poloz will need to see a substantial weakening in domestic data before the bank changes its stance,” Dominique Lapointe, an economist at Laurentian Bank, said by phone from Montreal. “The extent to which global tensions translate into lower business investment and exports in Canada has yet to be seen.”
Of the 15 economists surveyed by Bloomberg, nine expect the Bank of Canada to remain on hold to the end of 2020. Domestic banks are among the more optimistic -- with Toronto Dominion, Bank of Montreal, Scotiabank, National Bank and Laurentian expecting Poloz to hold well into next year.
But not all are convinced, with six analysts predicting at least one cut amid escalating U.S.-China trade tension that is raising doubts about the global growth outlook, and which prompted the Federal Reserve to cut interest rates last week.
Trade and investment are most at risk for Canada. While underlying export strength is at its strongest since 2015, evidence of slowing global demand is mounting. Inventory-to-sales ratios are at recession-era highs in both the manufacturing and wholesale sectors, and leading indicators for Canadian exporters are deteriorating. Signs are also emerging that the nation’s red-hot labour market is cooling off.
Royal Bank of Canada expects Poloz to cut rates in the first quarter of next year, with Canadian Imperial Bank of Commerce moving their call ahead to that same period earlier this week. Capital Economics, meanwhile, expects the central bank to lower its benchmark to one per cent by the end of 2020.
Yet, there are plenty of arguments in favour of a hold. Canada’s economy in the second quarter probably grew at a faster pace than the 2.3 per cent forecast by the Bank of Canada in its July monetary policy report. Interest rates also remain stimulative in real terms and the inflation rate is bang-on the central bank’s target.
Robert Kavcic, senior economist at BMO Capital Markets, sees another good reason for Poloz and his colleagues to buck the global easing trend. “Do they want to go back to 2015 where they cut rates and stoked a big acceleration in credit and home prices? That’s pretty fresh in their minds,” Kavcic said in an interview. “I don’t know if they want to go there right now.”
A re-acceleration in housing activity in many Canadian cities and some of the strongest wage growth in a decade, even as headline employment slows down, also has the potential to underpin consumption in the second half.