BoC seeing economy unfolding as it should; unlikely to rock boat on rates

0

OTTAWA – Bank of Canada governor Stephen Poloz is widely expected to leave well enough alone when it comes to interest rates Wednesday morning.

The central bank has been stuck with a policy setting of one per cent for more than three years now, in part because it has been forced to juggle the needs of a weak economy against fears that too-low rates were inducing Canadians to borrow more than is wise.

But while the bank’s views have evolved somewhat over the period, it has seen no reason to alter it’s bottom line that the economy still needs the stimulus of low borrowing costs, especially as governments are in a tightening mode.

Economists and markets also see no reason for change Wednesday, or likely for the rest of 2014.

Analysts also don’t believe the current governor, who has been softer on the need for rate hikes than his predecessor, Mark Carney, will change his tune.

There are some reasons for a more hawkish stance, says Doug Porter, chief economist with BMO Capital Markets, including a better than expected 2.9 per cent bounce in economic growth in the fourth quarter of 2013, and the recent uptick in inflation from below one per cent to 1.5 per cent.

But Poloz is also likely content with what his bearish posturing of the past few months has accomplished, says Porter, specifically a devaluation of the Canadian loonie to about 90 cents US that has helped boost inflation and brightened the export outlook.

“They (bank officials) well realize if they come across as more positive, the Canadian dollar is likely to strengthen. That’s why they will find some way to mix the good with the bad and keep the Canadian dollar relatively stable,” he said.

It won’t be difficult to find reasons for viewing the glass half empty in terms of the economy.

Last Friday’s gross domestic product report put the economy on a firmer positive track than the bank had it, but December’s 0.5 per cent falloff in output — even if it was mostly weather related — still gave a weak handoff to 2014. That means the first and second quarters of this year may be weaker than the bank forecast in January.

And the U.S., Canada’s biggest trading partner, saw its fourth-quarter downgraded by more than one percentage point, meaning the economy south of the border may still not be sufficiently robust to trigger a resurgence in Canadian exports.

Then there’s Ukraine, says TD Bank chief economist Craig Alexander, adding one more risk factor to an already uncertain world, although he doubts Poloz will make a direct mention of the crisis in bank statement.

Alexander says there is no reason at present for Poloz to offer guidance on interest rates, given that the time for any decision is so far away.

“There’s limited use in providing forward guidance if the forward guidance is too far down the road and I still think the Bank of Canada won’t do anything with interest rates until the second half of 2015,” he said.

Nominally, the bank is on record as being absolutely neutral about interest rates, which means there’s as much of a chance of a cut as of a hike.

But most economists don’t believe that is the case. The new GDP numbers, higher inflation and cooling housing market all point to the next move being higher, even if that is a year away. The icing on the cake is that according to Statistics Canada’s report on Friday, the savings rate has been inching up, meaning the bank has less reason to worry about household finances.

“We still believe there is a risk that the Bank of Canada could cut its policy rate within the next two years but, at this stage, it is a small risk,” David Madani of Capital Economists, who has been among the most bearish forecasters in terms of future growth in the economy, said in a recent note to clients.

Leave a comment

Your email address will not be published. Required fields are marked *