BoC Meeting Preview: Rate cut next week likely in bid to support economy

January 15, 2016

The Bank of Canada will meet on 20th January to take rate related decisions. The markets are eager to know what path the central bank chooses as it fights low oil price on one hand and rising inflation prompted by weak loonie on the other. When the central bank had least met in December, it had decided to keep rates unchanged at 0.50 per cent. The BoC noted that “the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate”, suggesting a neutral policy stance." The bank had at its last meeting adopted a neutral policy stance. 

The oil price has slid further since the last meeting of the BoC hovering around the $30 per barrel threshold. Canada’s economy depends largely on the income earned from exporting commodities, particularly oil. The Canadian dollar was lowered to retain the attractiveness of the goods and services produced in Canada, in a bid to compensate the losses incurred as a result of low oil price. He noted that falling commodity prices were draining $50-billion from the economy. Lower currency value, it seems will be a norm for some time as it continues to stomach the impact of falling commodity prices. However, given that Canada imports 80 per cent of the fresh fruits and vegetables consumed by its citizens, a weaker currency will imply people have to spend more to purchase the food items. Consumer prices in Canada went up 1.4 per cent year-on-year in November of 2015 on the increase in cost of food and shelter. 

Governor justified the central bank’s attempt to keep the dollar low, saying "The depreciation of our currency is a natural part of the process". Also, it was evident from Poloz’s speech on 7th January that the central bank did not wish to follow its US counterpart with respect to interest rate hike. It cannot be denied that the BoC’s decision to raise the rates or intervention in the foreign exchange market to support the falling Canadian dollar will for sure make good and services produced in Canada less accepted in the world market.

Canada’s economy needs support

Canada’s economy grew 2.3 per cent in the third quarter, matching expectations. However, the growth was noted to have shrunk 0.5 per cent month on month in September. Recently released data shows no improvement in growth. Real gross domestic product was unchanged in October. The central bank estimates the growth to be moderate in the last quarter of 2015. However, given the recent decline in oil, some economists fear growth to have stalled in Q4.

Slew of economic indicators released in the last few weeks have not been able to promise any hope. 
The pace of employment growth was noted to have slowed to 0.2% for each of the subsequent three quarters following a rise of 0.4% in the first quarter of 2015. The Canadian economy shed 35,700 jobs in November. The unemployment rate stayed unchanged in December. The worse-than-expected drop in jobs pushed November's unemployment rate up to 7.1 per cent. Retail sales posted a small rise of 0.1 per, lower than the 0.3 per cent rise expected. The weak fundamentals led economists at Nomura to conclude that the Canadian economy needs more support. Nomura thus forecast a slash in rates by 25bp to 0.25%. Nomura states “new information received has been mainly on the negative side, suggesting further weakness in the economy. Moreover, as we noted it is becoming clearer that the Canadian economy needs some support." 

The possibility of no change in rates cannot be completely discounted. According to Nomura, the BoC might continue with 0.50 per cent rates believing that better growth in the US will support its exports and boost its overall growth in the process. However, Nomura feels that the BoC might be willing “to buy some protection against a worsening of the economic situation.” A further delay in implementation of fiscal policy will postpone the positive impact of increased fiscal spending on growth to the third quarter of 2016.

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