The Canadian Press - ONLINE EDITION

TD says Bank of Canada may sound dovish, but won't cut interest rates

  • Print

OTTAWA - Bank of Canada governor Stephen Poloz is often accused of sounding dovish — to keep the loonie in check — but that won't lead to lower interest rates, says the TD Bank in a new analysis.

At a news conference last week, Poloz made headlines by referring to the "serial disappointment" of the global recovery, while downgrading Canada's economic outlook once again, this time to 2.2 per cent growth this year.

Markets reacted to Poloz's cautionary words by clipping the wings of the loonie in anticipation that if the central bank wasn't going to gut interest rates, it would at least keep the current one per cent setting in the overnight rate in place longer than expected.

Given what's happened in the economy during the first six months of 2014 — stalled jobs growth, 1.2 per cent economic growth in first quarter in Canada, contraction in the U.S. — Alexander said more monetary easing could be justified.

But, he added, it's "highly unlikely" the bank will go in that direction and that markets are probably correct in pencilling in the first rate hike for the fourth quarter of 2015, or about 15 months from now.

That's because the U.S. Federal Reserve is moving toward tightening, and a lower rate in Canada could encourage more borrowing in real estate. As well, inflation is perking up, even if the bank does not yet see it as a problem.

"One can debate whether the Bank of Canada will tighten monetary policy before, in tandem, or after the Fed," said Alexander.

"But one cannot debate that higher rates in the U.S. will also mean higher rates in Canada."

The Bank of Canada's overnight rate has been set at one per cent since September 2010.

David Madani of Capital Economics has been among the vocal private sector analysts in suggesting that Poloz should consider cutting rates, but he has also said the most likely outcome is that rates will stay unchanged for a longe term.

Most analysts, however, believe it would require a major economic shock, such as another recession, for the Bank of Canada to ease rates further, in part because borrowing costs are already at or near historic lows.

The unofficial C.D. Howe monetary policy council is recommending that the overnight rate be jacked up by three quarters of a point to 1.75 per cent by next July.

Alexander says when rates do start heading north, the central bank will likely do so in slow and incremental steps, until it reaches a normal or neutral position.

The question is what the "new normal" will look like. In the 1990s, the normal or neutral policy rate — the setting when the economy is operating at full capacity — was between 4.5 and 5.0 per cent, said Alexander.

Now, some U.S. economists believe the Fed's new neutral, when it comes to it, will be at about two per cent, which would imply a similar setting for Canada.

"In my mind, this is too low, as it implies a real neutral level of zero per cent (when inflation is factored in)," Alexander says.

"In other words, the next move is a hike, but the rebalancing of monetary policy should not lift it beyond (that) range."

That's can be attributed to the new cruising speed of the economy will also be slower, at about two per cent, according to the Bank of Canada.

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Jets This Week: Predicting the line-ups

View more like this

Photo Store Gallery

  • Aerial view of Portage and Main, The Esplanade Riel, Provencher Bridge over the Red River, The Canadian Museum for Human Rights and The Forks near the Assiniboine River, October 21st, 2011. (TREVOR HAGAN/WINNIPEG FREE PRESS) CMHR
  • PHIL.HOSSACK@FREEPRESS.MB.CA 101130-Winnipeg Free Press Columns of light reach skyward to the stars above Sanford Mb Tuesday night. The effect is produced by streetlights refracting through ice crystals suspended in the air on humid winter nights. Stand Up.....

View More Gallery Photos

Poll

Do you think e-cigarettes should be banned by the school division?

View Results

View Related Story

Ads by Google