The Bank of Canada’s decision on Wednesday to raise its key interest rate from one per cent to 1.25 per cent may be its only increase this year, according to economist David Rosenberg.
Gluskin Sheff + Associates’ chief economist told BNN that the Bank of Canada’s dovish tone in its rate decision commentary may force forecasters to reconsider whether more hikes are coming this year.
“To me, what’s more important is that a marketplace that believed we were going to get three more rate hikes after today’s is now having to second-guess that,” Rosenberg told BNN.
“Now it’s no longer three rate hikes, it’s now closer to two because I would refer to what was said today in the press statement as a classic dovish hike. Because while the bank did go today, they certainly didn’t do any favours for those forecasters who believe the bank is going to go three more times in 2018.”
“I think there’s a strong case with the tone today that they could be done for the year.”
The Bank of Canada mentioned the word NAFTA twice in its Wednesday monetary policy statement, noting that the country’s projected 2.5 per cent short-term economic growth “remains clouded by uncertainty related to the future” of the trade pact.
To Rosenberg, the difference between worrying about the end of the deal and worrying about the uncertainty surrounding the deal are two entirely different concerns.
“What was interesting was that the two sectors that the Bank of Canada said were most vulnerable to this ongoing uncertainty – not abrogation necessarily, but the uncertainty over the negotiations – [were] capital spending and exports,” Rosenberg said.
What the best argument against raising rates further?
“What happens if NAFTA uncertainty is sustained into the summer and we don’t get the impulse from capital spending or from exports and the economy underperforms expectations?” he added. “I fully understand that the bank says that interest rates will probably have to be ‘higher … over time’, I’m not so sure that means in the first half of the year.”
Rosenberg – who recently said Statistics Canada’s December jobs report was “highly skewed” and overstated Canada’s economic strength – said that data along with market expectations fueled the Bank of Canada’s first move of 2018.
“We got a little carried away, I think, looking at the employment data, but the Bank of Canada took advantage that the situation was priced in and moved rates up today,” Rosenberg said.
“Only a fool would have been saying over the last couple of days or even weeks – given that it was priced in – that the bank wouldn’t go. Because, when you have it 90 per cent priced in, heading into the meeting, if they don’t go, they’re going to get pasted with negative criticism over their lack of communication policy.”