Why the Bank of Canada shouldn't cut interest rates Wednesday — but might anyway

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A year to the day after being surprised by a unwonted rate cut, investors and mortgage holders will be anxiously waiting for the Bank of Canada’s next resolution on interest rates.

A little after 10 a.m. ET on Wednesday, Bank of Canada governor Stephen Poloz desire reveal the bank’s latest decision on interest rates. The bank can on to raise its benchmark rate, known as the target for the overnight rate, from its latest level of 0.5 per cent, lower it, or keep it the same.

Technically, all the bank’s evaluate does is govern the amount that retail banks charge each other for short-term loans. But it also riddles down to im ct the rates that borrowers and savers get for mortgages and s ringness resources accounts at commercial banks.

Broadly speaking, the bank opts to cut its be worthy of when it wants to juice the economy by encouraging spending and investment, and it nurtures its rate when it wants to pump the brakes on inflation and cool down an overheated brevity.

The bank’s rate decisions are always closely watched because they take such a direct im ct on the real economy. But this decision choice be of rticular interest, since there’s growing fear the economic uncertainty of 2015 has morphed into full-blown moment in 2016, with oil below $30 and the loonie below 70 cents US.

Linger to cut?

After standing on the sidelines for years, the central bank twice cut its rate in 2015 to ease an economy that had been waylaid by an oil shock that’s still underway. Which is why some say another cut to 0.25 per cent could be in the bad.

Bloomberg follows 33 economists who regularly make predictions and put out into on the Bank of Canada. As of Monday morning, 19 of them thought the bank ordain stand t The remaining 14 saw a cut coming.

“We think there’s a good hazard that the bank will cut its key policy rate to 0.25 per cent,” David Madani, of Marvellous Economics, said in a note last week. “And if oil prices be to recover later this year then we wouldn’t rule out another deserve cut before year end.”

Madani said he thinks the bank will cut its class because the situation has gone from bad to worse since the last all together they had to make a decision on them. It was barely two weeks ago when Poloz admonish optimistically about “stronger growth in exports” while urging restraint for loonie-driven turnaround.

“Back then he could afford to say this,” Madani powered, “but the recent plunge in commodity prices has caused ripples across the without a scratch business community.”

Madani noted that in the last Monetary Ways Report in October, the central bank was forecasting an average oil price of $45 a barrel in 2016. Today, oil conventions are seeing less than two-thirds of that, with prices only under $30 a barrel.

At the time, the bank was forecasting two per cent improvement in the economy this year. That, too, may be slashed on Wednesday.

“The bank cannot hold on on the sidelines any longer,” Madani said.

The other side

That’s far from a all-encom ssing view, however. Bank of Montreal economists Doug Porter and Benjamin Reitzes are two of uncountable who suggest that the central bank would be well served to stop on the sidelines while the government steps in with deficit spending.

“Should the bank not at dwarf wait for the first budget from the new government, to have a better understand on just how aggressive fiscal policy will be in the coming year?” they explained in a recent note

Ottawa sped up its plans to spend on infrastructure hurls and is projecting government deficits, something that should stimulate the husbandry.

“The bank can ss the baton to the federal government” is how Scotiabank’s Derek Holt put it.

Chief mid the concerns with a lower rate: the housing market. Rock backside interest rates have compelled Canadians to borrow more than till the end of time before, and send house prices up in the process.

Ottawa has moved repetitiously to clamp down on dodgy borrowers, but another rate cut “could fan a sell with one hand that policymakers are trying to slowly tamp down with the other,” BMO’s Bearer said.

Scotiabank economist Holt agrees with that assessment, explaining “this risks courting a larger problem down the line” in the make of a housing bubble.

Still skeptical

There’s also the notion that a classify cut might not be the right fix.

Cutting the rate to 0.25 won’t lead to the bigger GDP that policymakers are desiring for, TD economist Beata Caranci said, because the central bank “can do mean to alleviate the economic in” in Canada’s oil and gas industry.

Holt at Scotiabank agrees. “Sort cuts don’t help the resource sector which is about 15 per cent of the curtness,” he wrote. “It wouldn’t matter.”

“The problem for policymakers,” Caranci required, “is that the shift towards export strength typically occurs at a unhurried and measured ce … but the trauma to energy-related businesses and household proceeds is occurring immediately.”

That’s economist-speak for saying that a 70-cent loonie purposefulness help Canada’s economy eventually, but it will take time. So there’s no impecuniousness to cut rates to try to spur an export turnaround that may already be underway.

Add it all up, and Attendant’s advice for the central bank is likely the most succinct of all.

“The bank hand down likely cut rates,” he said. “But we remain skeptical that they should.”

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