–External Headwinds ‘Blowing Harder’ So Stimulus Still Needed
–Some Few Analysts See Rate Cut Rather Than Hikes In Future
OTTAWA (MNI) – The Bank of Canada likely will maintain the economic stimulus of its 1.0% policy interest rate on Tuesday, for the 11th successive rate-setting time, and those who parse its words will be looking only for any change of tone.
Governor Mark Carney at the Bank has made clear in statements and in the most recent (October) Monetary Policy Report that there will be no change for the foreseeable future. He does, though, continue to insist that the Bank will remain “flexible,” in the light of world and domestic future developments. He speaks most particularly of the never-ending European debt and banking weakness.
There is near-unanimity among analysts that the Bank will stand pat with the 1.0% rate that it moved to on September 8, 2010, from 0.75% in July last year. Some see that rate continuing through the third quarter of 2012, and some see it continuing deeply into 2013. But with headwinds “blowing harder,” as Carney has put it, from Europe and the United States and some slowing of growth in Asia, there are a few who see the Bank lowering rates rather than hiking them in the future.
Michael Gregory, senior economist at BMO Capital Markets, is not one of them. He sees inflation as posing no concern, that high consumer debt and high house prices argue for increases over rate reductions, and that the Bank believes there already is “considerable monetary policy stimulus” from the “historically low” 1.0% rate.
Gregory does note, though, that the Bank, having joined with the Federal Reserve and other key central banks in expanding global banks’ access to U.S. dollars, clearly sees “some risk of the headwinds blowing even harder.” He adds, in a research note to clients:
“The market sees this too, currently pricing in a 25-basis points BoC rate cut by next June.”
Most analysts believe the Bank will take the longer-term attitude, with Dr. Sherry Cooper, chief economist for BMO Financial Group, that the international central banks’ reduction of the cost of dollar swaps better enables European banks to borrow, but is no long-term solution. “It does not address the underlying fundamental problems,” she wrote on December 2. “The solvency issues, the recapitalization of the banks, and the imbalances in the eurozone, have yet to be dealt with — not to mention the politics of greater fiscal integration.”
At TD Economics, macro strategist Mazen Issa writes that, short of European collapse, the BoC would prefer “to remain on the sidelines” at 1.0%. He expects the Bank to say that the previously noted risks to the Canadian economy, of Europe and of weak demand from the U.S. and some slowing down in China, have all materialized. He believes the BoC will say again, as it has, that “the current stance of monetary policy is appropriate and (that the Bank) stands ready to provide liquidity if needed” because of worsening funding market pressures.
Canada’s own economic indicators have been mixed. Jobs growth is slowing, although full-time work is increasing from the huge pullback in September. Exports have picked up. The current account deficit has narrowed, but still is a deficit. Statistics Canada recently reported third-quarter growth of the economy at an annualized and booming 3.5%, far above earlier Bank expectations of 2.0% growth for Q3 — but much of that growth represents a rebound from serious temporary factors that gave Canada a very low Q2. The Bank forecasts slow growth for Canada in 2012.
Ten of 11 senior economists from business and universities in Canada, grouped together by the C. D. Howe Institute, a leading economic think tank, have called for the Bank of Canada to stand pat on Tuesday. Nine of the 11 would have the BoC continue with 1.0% at the following setting, January 17. For six months hence, two would cut the rate and one would raise it. In a year’s time, six would still have the 1.0% rate while three would have raised it by then and two would have reduced it.
The main and shared outlook was that “Europe’s slide into recession, the likely intensification of its financial crisis, and the huge potential hit to global growth, inclined the group to urge no change.”
** Market News International Ottawa **
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