August 30, 2019 / 12:08 AM / 23 days ago

To hold or cut: Bank of Canada's dilemma also splits economists - Reuters poll

BENGALURU (Reuters) - Whether the Bank of Canada waits until early 2020 to lower interest rates or does so this year has left economists polled by Reuters almost evenly divided, but they say the likelihood of a cut by year-end has increased dramatically from last month.

FILE PHOTO: Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

The BoC at its previous meeting in early July showed no appetite for easing policy amid steady domestic activity, even though the U.S. Federal Reserve was set to cut rates for the first time in a decade - which it delivered late last month.

But the risk to the global economy has risen again from the U.S.-China trade war, which has escalated significantly over the past month.

While that suggests the BoC is unlikely to diverge from major central banks’ easing bias for long, an Aug. 23-28 poll of nearly 40 economists showed the central bank would keep its benchmark rate unchanged at 1.75% at its Sept 4 meeting.

A majority of economists, 22 of 39, also predicted no change to BoC rates in the fourth quarter of this year, either.

The remaining 44% of economists predicted, however, the bank would cut rates in the fourth quarter, including two who saw a 50-basis-point cut.

That is a significant shift in expectations from a poll taken ahead of the BoC’s July meeting, where only 15%, or five of 33 respondents, predicted any cut this year.

“The risks from heightened trade tensions, and the new round of tariffs which are going to take effect this weekend, just increase the downside risks to the economic outlook in the second half of the year,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.

“With the Fed likely easing in September and then again in October, it looks as if it would be the prudent thing to do for the BoC to take up some insurance as well.”

The poll showed the BoC will cut rates by 25 basis points to 1.50% in the first quarter next year and keep them on hold after that through end-2020 at least. That compared with 1.75% through next year predicted in the previous poll.

There is now a 60% chance of a cut by end-2019, according to the median probability of a smaller sample, 23 respondents who answered an additional question. That is a significant increase from 35% in the July poll.

That probability jumped to 80% for a BoC rate cut by the end of next year, compared with 45% given previously.

Money markets expect the central bank to ease rates by the end of the year. BOCWATCH

“Our current forecast is for the BoC to lower rates in January of next year. But the further escalation in the trade war that we saw since we last refreshed our forecasts have raised the odds that they will move even earlier than January,” said Josh Nye, senior economist at RBC.

Potential rate cuts has bolstered the outlook for Toronto’s stock market, which is forecast to notch a record high next year, according to a poll of equity strategists.

Economists in a separate poll predict Canadian gross domestic product growth, set to be released later on Friday, to have been strong last quarter. (reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/econ-polls?RIC=CAGDPA%3DECI poll data)

That, along with a steady inflation rate around the central bank’s target of 2%, could provide some relief for policymakers although clear signs of a global economic downturn have raised doubts over the sustainability of the recent recovery in Canada.

Declining prices of oil, Canada’s biggest export item, resulting from slowing global demand are expected to hurt the domestic economy.

Canada’s housing market, which is one of the biggest contributors to the country’s economy, has slowed recently and is not expected to pick up anytime soon, according to a recent Reuters poll. [CA/HOMES]

“The rear-view mirror may be showing a rebound of growth, but the road ahead continues to crumble. A rate cut likely requires the BoC shifting from data dependency to risk management mode, which means a change in communication,” noted Brian DePratto, senior economist at TD.

“This puts the likelihood of a September rate cut near zero, but if past precedent is anything to go by, expect a ... forecast downgrade from the bank this fall, leaving the risks tilted towards easing.”

Polling by Sarmista Sen and Indradip Ghosh; Editing by Ross Finley and Steve Orlofsky

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