Bank of Canada Governor Stephen Poloz has an opportunity Monday to address market expectations that his next move will probably be an interest-rate cut.
Poloz speaks in Iqaluit, the capital of the northern territory of Nunavut, in his first appearance since the Federal Reserve’s surprise dovish policy shift two weeks ago triggered concern about the state of the global economy. A segment of Canada’s yield curve considered a potential recession signal inverted March 22 for the first time since 2007. Investors now see a strong chance of a cut by the Bank of Canada over the next 12 months.
This raises a major challenge for Poloz, one of the few central bankers worldwide still talking about the need — at least over time — for rates to move higher. Whether he shrugs off the latest market moves remains the big question ahead of the central bank’s next decision on April 24.
“We don’t think it’s appropriate to be talking about cutting rates at this juncture,” said Doug Porter, chief economist at Bank of Montreal. Poloz “could take one more turn of the dovish screw, I suppose, by going completely neutral — although I believe it would be more appropriate to do that at the next decision date. ”
The gap between Canadian three-month and 10-year rates went negative on March 21, tracking a similar move in the U.S. For investors predicting a recession south of the border, it wouldn’t be far-fetched to assume Canada would be pulled into one as well. All of the country’s last eight recessions have coincided with contractions in the U.S.
Last Statements
The Bank of Canada hasn’t said much during the recent turbulence. Its last public communication was a March 14 speech by Senior Deputy Governor Carolyn Wilkins in which she highlighted the vulnerabilities created by global leverage but said the central bank expects the worldwide expansion to continue and Canada’s economic growth to pick up after a weaker-than-expected first half.
Her comments reiterated language from the central bank’s decision on March 6, when it left rates unchanged and toned down its conviction that interest rates need to go higher, while sticking to an overall hiking stance.
Poloz’s speech, titled the “Importance of Trade,” will be published at 2:55 p.m. Ottawa time. Iqaluit is situated 195 miles south of the Arctic Circle.
Even as markets continue to bet on cuts, the data is mixed enough to keep Poloz on the sidelines for the foreseeable future. The latest gross domestic product data show the economy expanded at a 0.3 per cent pace in January, painting a less bleak picture than feared. Growth is tracking an annualized first-quarter pace of more than 1 per cent, a big improvement from the previous quarter’s 0.4 per cent.
What Bloomberg’s Economists Say
“The Canadian expansion faces a host of challenges in 2019. Escalating global risks and weaker-than-expected GDP at year-end signal below-trend growth this year. This means inflationary pressures should be subdued, which will allow the Bank of Canada to pause on its path back to neutral to assess the changing landscape.”
The Bank of Canada will release a new set of quarterly economic forecasts at its April meeting that will likely be revised down. In January, it forecast growth of 2 per cent in 2018 and 1.7 percent this year. The 2018 number came in at 1.8 per cent. Economists have since lowered estimates for 2019 closer to 1.5 per cent.
Neutral Rate
Policy makers will also use the April meeting to review their neutral interest rate forecast — a key variable for plotting decisions. The measure is used to gauge how stimulative the policy rate is: the bigger the gap between the actual rate and the neutral rate, the more stimulative the policy, while a smaller gap would indicate fewer hikes are required. A downward revision would imply current policy is tighter than previously assumed.
Until now, the central bank has estimated the neutral rate is between 2.5 per cent and 3.5 per cent, versus a policy rate of 1.75 per cent.
Bloomberg.com
