For years, the Bank of Canada’s rate announcements have been somewhat anti-climatic; with the Overnight Lending Rate held at 1 per cent since September 2010, it became a safe assumption for market watchers to forecast status quo each time the BoC made their statement. That changed this January, when the Bank blindsided borrowers and economists alike with a 25-basis point cut. The next rate announcement approaches on March 4, and the potential outcome is arguably the most anticipated in recent history.
Until this week most economists were forecasting a rate cut of another 25 basis points. But now Bank of Canada Governor Stephen Poloz has thrown that into speculation with recent speech he made at the University of Western Ontario, remarking that the Bank had taken the right amount of “insurance” when it cut rates in January. He stated, “The downside risk insurance from the interest rate cut buys us some time to see how the economy actually responds,” adding, “The oil-price shock is an important setback in our progress toward full capacity, full employment and stable inflation because it is a net negative for economic growth.”
His comments caused an abrupt about-face for many rate forecasters. According to a Reuters poll, one in four economists changed their tune and now anticipate that the rate will remain at 0.75 per cent until Q2 of this year, when it may be cut to 0.5. There are also expectations that conditions may improve to the point of warranting rate hikes by early 2016.
Poloz also confirmed that the impact of oil’s price plummet is the main cause behind the rate cut; The commodity has lost more than 50 per cent of its value since July 2014. This has the Bank concerned not only about a slowdown of business activity and job losses but also the increasingly risk of low inflation.
U.S Remains Patient
The BoC isn’t the only monetary policy maker holding fire on rates; South of the border, all eyes are on the Federal Reserve and when and if it will raise rates. A rate hike in the U.S. could immediately put pressure on Canada to do the same. Recently, the Federal Reserve Chair Janet Yellen changed forward guidance, asking markets to remain patience with it comes to raising rates. Speaking before the Senate Banking Committee she said, “It is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings.”
Canada Needs More Time
The Bank still does not have a full picture of what impact the rate cut in January has had on the economy. Poloz maintains he remains most concerned about lower oil prices, stating, “And because lower oil prices mean lower Canadian income, the shock will worsen the debt-to-income ratio of Canadian households, thereby increasing financial stability risks.” With these new comments Canadians should not expect another rate cut in March, but that does not rule out one down the road if inflation and oil prices remain low.