OTTAWA – With interest rates apparently set in concrete, the Bank of Canada is expected to provide a cautious offering when it issues a new outlook Wednesday morning.
A subdued global economy means the bank will need to revise downward its forecast for economic growth for this year and likely next year, from the current expectation of 1.8 and 2.7 per cent respectively, say analysts.
And the bank may also need to set back the timetable for when it expects the economy to return to full production capacity beyond the end of 2015.
Under these conditions, Bank of Canada governor Stephen Poloz will look to keep the trendsetting overnight rate, which determines short-term interest rates, at one per cent – where it has stayed for the past three years.
“I don’t see them doing anything with interest rates until the spring of 2015,” says Jimmy Jean, an economist with Desjardins Capital Markets.
“It’s a timing thing. It’s clear there is a tremendous opportunity to expand our exports, which will lead to more business investment, but we keep walking into crisis after crisis … if it’s not Europe, it’s the U.S., or something else.”
CIBC deputy chief economist Benjamin Tal notes that the bank has not changed its mind about the path of future growth.
At some point, the global and particularly the U.S. economy will reach what Poloz has referred to as a “tipping point”. That, in turn, will lead to a boost in demand for goods, such as oil, that Canada has to export, spurring cash-flushed businesses to invest and taking the economy out of the slow lane, where it’s been for two years.
The bank has referred to this mechanism as the “rotation” from reliance on domestic demand, which despite a recent revival in housing is clearly tapped out, to an export-oriented demand, which has yet to fully recover from the recession.
It was supposed to happen in the latter half of this year.
It was even hoped to have started earlier, but the U.S. political system got in the way first with the fiscal crisis at the end of 2012, then with sequestering in the spring of 2013. Not content with those self-inflicted wounds, Congress shut down the government for 16 days in October and moved on to frighten international markets with the prospect of a U.S. default.
By most estimates, the political shenanigans drained about two percentage points from U.S. growth this year. More critical, they helped crush the momentum in the U.S. economy, which had rebounded smartly to 2.8 growth last year, only to fall off this year to what is expected to be 1.6.
Evidence of the impact could be deduced from Tuesday’s employment numbers in the U.S., which showed job creation slowed to a paltry 148,000 in September, say economists.
Bank of Montreal economist Michael Gregory says there’s little the Canadian central bank can do about any of the developments south of the border, except become more cautious about its expectations of a turnaround.
“I think the Bank of Canada has become a little more worried and I think that will be reflected tomorrow,” he said.