When the Bank of Canada kept its overnight interest rate at 1.75% last week, and toned down its previously firm stance on its need to raise rates, it signaled the central bank was putting any further rate hikes on pause.
But some see this as more than just a pause. A few analysts are now predicting that when the BoC moves again, it will not be a hike, but rather, the first rate cut since 2015.
David Rosenberg, the famously bearish economist, said that a deterioration in the Canadian economy will soon force the BoC to act.
“We just came off two straight quarters of negative growth in real final demand. So, if we’re not in a recession yet, we’re just basically one notch away,” Rosenberg told BNN on Monday.
Capital Economics predicts the BoC will cut rates to 1.5% by the end of the year, in a research note published by the London-based research firm prior to last week’s rate announcement. Stephen Brown, the firm’s senior Canada economist, pointed out that recent speeches by the central bank’s Senior Deputy Governor, Carolyn Wilkins, and Deputy Governor, Timothy Lane, notably did not mention the prospect of rate hikes in the near future.
This is likely due to the economy, which slowed down more than economists had expected in the latter half of 2018. “It’s not hard to see why officials are concerned,” Brown wrote. “The available data suggest that GDP fell for the second month running in December, by 0.1%. Worse still, that weakness appears to have been broad-based.”
More calls for rate cuts following March meeting
While some had been calling for rate cuts prior to last week’s announcement, the chorus only grew louder following the dovish wording used by the BoC.
On Monday, mortgage broker David Larock noted that, by the BoC’s own estimate, the five rate hikes that the central bank introduced since 2017 need up to two years “to exert their full impact” on Canada’s economic momentum. If each of those hikes continue to slow down the economy even further over the next year, “I think there is a very good chance that the BoC will decide that it has over-tightened and will cut its policy rate in response,” Larock predicts.
“The BoC now expects inflation ‘to be slightly below the 2 per cent target through most of 2019’, so if it wants to exercise caution in the face of heightened uncertainty and if rising inflationary pressures aren’t going to force its hand, there should be little urgency to move rates, at least until late 2019.”
The BoC’s rate announcement last week came on the heels of a disappointing quarter, which saw slow economic growth, dampened household spending and uncertainty about global trade — prompting some commentators to predict a recession in the near future.
However, the majority of economists right now are not calling for a rate cut. The consensus right now is for no rate hikes this year, with Bank of Montreal saying that if the current weakness continues, the BoC will communicate it intends to stay on the sidelines for the rest of the year.
“If the data deteriorate further ahead of the next policy meeting, the next step for the BoC is to go full neutral and drop its super-soft tightening bias altogether,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO.