Don’t expect any market-moving news from the Bank of Canada tomorrow.
If you ask the two-time winners of the BoC’s Governor’s Challenge—which has been running for two years—the Bank will stand pat on rates, due partly to uneven global growth. Domestic and international growth (in areas such as Europe and China) are sluggish, while the U.S. continues to inch ahead and consider rate hikes.
The teams that won the 2015-2016 and the 2016-2017 BoC challenges were from McGill University’s Department of Economics. This year’s team consisted of five students and two faculty advisors: professor Francisco Ruge-Murcia and associate professor Christopher Ragan.
Ragan spoke with Advisor.ca about his team’s win and interest rate prediction for March.
Outlook for interest rates
“There wasn’t a strong case to raise rates and there was an even weaker case to lower rates, so you’re left with [the BoC] holding the line,” says Ragan, based on the team’s final round findings in early February. In the first round in early November 2016, they made the same call.
In fact, says Ragan, none of the five teams that competed in February recommended raising or lower domestic interest rates in the near term.
Ragan’s team argued that “there’s still a lot of excess capacity, and there’s still pretty sluggish growth. We have an output gap that’s probably more than a percent, and […] private investment that is still way off the mark, exports that are way off the mark. There’s lingering weakness in Canada.”
As if that wasn’t enough, the team found “we’ve still got a housing market that is pretty [expensive] in parts of the country, so there’s a risk of collapse.” Add in uncertainty in the U.S., and that means leaving rates as they are.
When it comes to lowering rates, says Ragan, the team argued that “monetary policy at this point is probably pretty ineffective,” and that a rate cut would be a tough sell. Instead, the students pointed to the benefits of fiscal over monetary policy.
During the Q&A portion of the final round, the judges quizzed the team on their global outlook. Ragan says one question focused on the Chinese economy and how a slowdown there might impact Canada.
The team explained China could be impacted by oil prices and fiscal stimulus flops. “Even though we don’t trade that much with China, a growth slowdown [there] would push down commodity prices, and that’s a really important variable for Canada,” says Ragan.
If that were to occur, the team argued the Bank of Canada could boost the sector through added liquidity, or a rate cut. Ragan notes, “You can’t solve the fundamental problem, but you can strengthen aggregate demand slightly.”
What to expect from the BoC
- In a weekly highlight, Prab Sagoo of Nasdaq Advisory Services says, “Expect [BoC Governor] Poloz to remain somewhat dovish, citing loonie strength and output gap. Economic data has been strong in [the fourth quarter] but underlying employment trends are far from convincing.”
- BMO’s Rates Scenario report predicts the BoC will stand pat until mid-2018 due to global economic and trade-related pressures.
- Scotiabank says Poloz’s mention of a rate cut being on the table remains relevant going into this announcement. It adds the BoC’s release will likely be “short and sweet,” given “not a whole lot has changed since [January], and many of the uncertainties flagged by Poloz at the time remain in place today.”
- TD is toeing the same line, noting in a report, “For the Bank of Canada, we expect the focus at next week’s decision to remain on the strength of the currency, rising longer-term borrowing costs, and still weak underlying inflationary pressures. As such, we remain of the view that the Bank of Canada is unlikely to move its policy interest rate from 0.50% any time soon.”
- In its Week Ahead report, CIBC highlights “the recent spate of positive data” in Canada. However, the bank also predicts the central bank won’t hike rates until around mid-2018, “seeing the loonie pushed weaker by higher U.S. interest rates in the interim.
- RBC, which also calls for a “cautious tone” in the near term for the BoC, provides a global view in its Central Bank Watch report. RBC doesn’t expect much change in the U.S., England or Europe in the near term.
What set the team apart?
There are two reasons this year’s team stood out, says Ragan. First, they gave a “very structured” presentation—it started with a quick global overview and moved to their outlook for Canada, which the team spent the most time discussing. Overall, he adds, the students used only relevant information, using fewer graphs than most other teams but providing in-depth comparisons (e.g., they directly compared private and public investment since 2009 as well as Chinese, European and North American growth).
Where they excelled most, Ragan adds, was the Q&A with the judging panel, since the team provided concise, linear answers.
For next year, Ragan anticipates the 2017-2018 team won’t change its process but may try to present, if warranted, a more contrarian outlook. He muses, “[I] wonder what would happen if you said something that was really quite contrary but really defended it well. How would that be viewed?”
How the competition works
On its website, the BoC says teams must “analyze and forecast economic developments and recommend whether to raise the Bank’s key interest rate, lower it, or leave it unchanged – in order to keep inflation low and stable – in line with the 2% inflation target.”
The competition is split into two stages: during the first, teams present their interest-rate outlooks in the fall via videoconference with a panel of BoC judges; during the finals in February, finalists give live presentations in Ottawa in front of judges and must answer follow-up questions. During both stages, judges critique teams’ analysis, presentation style and teamwork, and points are deducted if teams go over time.
For 2016-2017, 24 teams participated in the first round while five teams competed in Ottawa. The judging panel for the final round included deputy governor Lawrence Schembri, who, in a release, praised the students’ use of macroeconomic theory and appropriate policy options.