Vancouver, B.C.- Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres (DLC) was expecting the Bank of Canada to leave interest rates unchanged today in the wake of the surprising rate cut in late January. Governor Stephen Poloz signaled this wait-and-see stance last week, following criticism that his surprise move had destabilized financial markets, thwarting the Bank’s efforts to boost economic activity. “The Bank has become increasingly concerned about the dampening impact of the plunge in oil prices on business capital spending and production in the oil sector—a key component of Canadian economic expansion in the past,” said Dr. Cooper. Recent layoff announcements in the oil patch exacerbate this concern.
“For now, core inflation in Canada remains quite low, giving the Bank plenty of leeway to maintain a very accommodative policy stance,” said Dr. Cooper. “However, the weakness in the Canadian dollar will increasingly show through in rising import prices, as so many consumer and business products are imported from the U.S.”
The Bank of Canada continues to project that the dampening impact of lower oil prices will be felt in the first half of this year, leaving open the possibility of another rate cut in coming months, maybe as soon as its next meeting on April 15. The hope is that the weaker Canadian dollar will offset the oil price shock by boosting non-energy exports and investment. Lower oil prices have been good for consumers and non-energy businesses that are heavy users of energy.
Dr. Cooper believes that with “the U.S. economy leading global economic expansion, the Federal Reserve is poised to hike rates for the first time in nearly eight years, probably by the late-June meeting. This alone will put some further downward pressure on the Canadian dollar. Hence, the Bank of Canada’s caution in cutting rates now; but if non-energy exports and business investment do not follow through, the Bank will cut interest rates further, accepting the Canadian dollar fallout”.
“My view is that the Canadian economy will grow at about a 2-1/4 percent pace this year with long-term yields edging higher by yearend. In sum, while mortgage rates might fall a bit further in the next couple of months,” said Dr. Cooper. “They are headed higher by yearend. The rise, however, will be muted. Next year, expect the Bank of Canada to begin to tighten, raising overnight rates very gradually. This, of course, is predicated on a near-term bottoming in oil prices, edging to the $60-to-$65 a barrel range in the next year. As always, central bank action will be data dependent.”
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