Economic Signs Point To Another Interest Rate Cut Next Week

By: Gary Parkinson on July 8, 2015

One week from today, the Bank of Canada will make the fifth overnight interest rate announcement of 2015. The rate update will coincide with the third monetary policy report of the year, which will recap Canada’s economic performance in the second quarter.

Unfortunately economists are warning Canadians to prepare for troubling data in the monetary report. TD Bank has publicly stated Canada is back in recession following two quarters of economic contraction, while other privatized analysts believe the data will encourage Bank of Canada Governor Stephen Poloz to cut the overnight interest rate for a second time this year.

Poloz ended the four and a half year freeze on interest rates in January by reducing the overnight rate from 1 percent down to 0.75 percent. At the time, he referred to the movement as an “insurance policy” to protect the Canadian economy in the wake of collapsing oil prices around the world. Last month he referred to the rate cut as “necessary surgery.”

Necessary surgery could be required again this month as Canada’s trade deficit grew larger in the first half of 2015. Data reported by the Financial Post shows that the gap between Canadian imports and exports expanded to $3.34 billion at the end of May, spurred on by reduced exports of metal ore, industrial machinery, and even forestry.

Exports are an important stimulant for the Canadian economy, a healthy sign that businesses are investing in the development of Canadian manufactured goods. A vibrant export market is equally important to Canada as a strong housing and mortgage market, one of the most important sectors of consumerism in the country.

A separate report highlighting the number of jobs created in May will be released later this week, which will be the final piece of economic data prior to the Bank of Canada update next week. If the jobs report shows fewer than expected jobs created in the spring, Poloz will be under greater pressure to provide even more relief on interest rates.

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