2 reasons the BoC won’t cut rates

By Sarah Cunningham-Scharf | April 12, 2016 | Last updated on April 12, 2016
3 min read

The Bank of Canada won’t cut interest rates this week for two reasons, says Benjamin Tal, deputy chief economist at CIBC World Markets.

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“[First], we’re seeing a situation in which the global economy is starting to improve,” he explains. “The stock market is doing better and China is stabilizing.”

Read: Don’t fear China’s slowdown, says BoC

Second, the Canadian economy is strengthening and the weak loonie is starting to make its mark.

Together, these trends mean the BoC likely won’t think about cutting interest in the medium term. The central bank will aim to keep the dollar low, he adds, but “[it] won’t touch interest rates until 2017. We’re in a neutral interest rate environment for at least another year.”

Read: BoC says volatility abating

What’s in store for Canada?

“We have a tale of two economies: we have the [weak] energy the sector and then we have the rest of the economy, especially manufacturing,” says Tal, who predicts the energy sector will continue to decline.

“We think [energy] investment will continue to slow down, and jobs in Alberta will be lost,” he adds. “[We] are basically in the second or third inning of this [low oil price] game.”

Read: High correlation between oil and risk assets

In contrast, manufacturing is a bright light. “We’ve been waiting for improvement in the manufacturing sector for a year now and only recently are we seeing some [upside] when it comes to exports, shipments and GDP. For the first months of the year, [performance] has been better than expected.”

One reason for this, says Tal, is the loonie has dropped from parity with the U.S. dollar to around US$0.75 (the loonie is currently sitting slightly above that level). This dip has helped boost manufacturing, given the sector suffered when our dollar was even with the greenback.

Tal explains, “We lost a lot of capacity during the dark days of parity, so we wanted [improvement] but we couldn’t because of capacity restrictions.” Now, however, “The impact of the [low] dollar is starting to penetrate the overall economy in a more positive way, with non-energy investment waking up and manufacturing activity moving in the right direction.”

Read: Low loonie to boost manufacturing sector: CIBC

Going forward, he adds, “We probably will see the consumer doing all right, but not great. Credit is still rising by 5% or 6% and that will support activity when it comes to consumption. But the key is investment in manufacturing.”

Read: Loonie won’t fully recover until the end of 2016

The uptick in manufacturing is good news because the BoC has worked to depreciate the Canadian dollar over the past 12 to 18 months. In fact, the central bank was considering cutting rates a second time as recently as a few months ago. The Bank made its first 25-basis-point cut in July 2015.

In Q1, there was also speculation that the BoC would cut rates due to global reasons, given “the global geopolitical situation [was] a bit troubling and there was the correction in the stock market.” As such, it’s worth monitoring how the global economy performs throughout the rest of 2016.

Read:

Global trade going, but Canada falling behind

Investors should look beyond North America

Is recovery on the way for U.S. economy?

Sarah Cunningham-Scharf