Economists now think a Bank of Canada rate hike could come even sooner than expected
Ari Altstedter and Catarina Saraiva, Bloomberg News | May 15, 2015 12:38 PM ET
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THE CANADIAN PRESS/ Patrick DoyleEconomists see Bank of Canada Governor Stephen Poloz raising the benchmark rate by the middle of next year, compared with forecasts a month ago that had him waiting until the end of 2016, according to median estimates of Bloomberg surveys.
Bank of Canada Governor Stephen Poloz’s optimism on the economy is proving contagious.
Economists have moved up forecasts for when they anticipate growth will be strong enough to warrant the central bank to increase interest rates. They see Poloz raising the benchmark rate by the middle of next year, compared with forecasts a month ago that had him waiting until the end of 2016, according to median estimates of Bloomberg surveys.
In his April rate decision statement, Poloz said there wasn’t any need to cut rates a second time this year because, while collapsing oil prices would halt growth in the first quarter, the economy would rebound in the following two periods. The bond market even came around earlier, with traders already resetting expectations for future borrowing costs.
“It’s been what Governor Poloz has been saying in his speeches, his press conferences,” said Silvana Dimino, an economist at JP Morgan Chase & Co. who now sees the first rate rise in the middle rather than the end of next year. “They’re pretty optimistic.”
In January Poloz cut the bank’s overnight lending rate to 0.75 per cent from 1 per cent to cushion the economy from the collapse in prices for crude oil, Canada’s largest export. That prompted traders to bet another cut was coming, helping send the Canadian dollar to a six-year low.
Since then, oil has recovered and economic data has come in better than economists forecast. Poloz told Canadian law makers last month there’s no need for more stimulus.
Should Poloz stop at just one rate cut, it would be a rare instance of a reduction of 25 basis points providing enough stimulus. Since 1996, the Bank of Canada has always made successive cuts to its policy rate, according to data compiled by Bloomberg.
Poloz has said he expects the damage from a drop in oil will start to be overshadowed in the second half of this year as “positives” including stronger U.S. demand for Canadian goods move to the forefront.
In the bank’s own forecasts accompanying its April 15 rate decision, the outlook for first quarter growth was cut to zero, while the second quarter projection was increased to 1.8 per cent, and the following quarter’s forecast to 2.8 per cent. The bank said the economy will return to full capacity around the end of next year.
The bank’s forecasts are still more optimistic than the median among economists, which see 1.6 per cent growth this quarter and 2.1 per cent the next, according to the latest Bloomberg survey.
“He recognizes there’s going to be some weakness in the Canadian economy, but he’s saying its going to be front loaded,” Dimino said by phone from New York. “If things go as they’re saying, and the output gap does close around the end of 2016, it seems reasonable they would start hiking before that.”
After pricing in a second rate cut since the January reduction, traders have now almost completely discounted the possibility in banker’s acceptances contracts, a predictor of rates. Contracts due December 2015 reached 1 per cent this month, the first time they haven’t implied any more rate cuts since Jan. 21. So-called Bax contracts have settled about 20 basis points above the central bank’s target rate on average since 1992, data compiled by Bloomberg show. The yield has averaged 0.91 per cent this year.
“The economists are just following the markets,” said James Dutkiewicz, who oversees $19 billion as chief investment strategist at Sentry Investments Inc. in Toronto.
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