4 Mar

Speculation Since The Bank of Canada’s Surprise Rate Cut In Late January


Posted by: John Dunford

 There has been much speculation since the Bank of Canada’s surprise rate cut in late January, but have the predictions come true?

 Following the last cut on January 21, many big banks predicted a further cut would be made today, but the Bank of Canada has moved to maintain the rate at ¾ per cent, citing improved economic conditions since that last move.

 “Financial conditions in Canada have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments,” an official release from the central bank states. “This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar. These conditions will mitigate the negative effects of the oil price shock, further boosting growth through stronger non-energy exports and investment.”

 Prior to the announcement, a Bloomburg news poll revealed 18 of 23 economists polled believed the BoC would hold the rate at 3/4 per cent.

 However, in early February, several of the big banks predicted a further cut.

 “The Bank of Canada assumed upcoming weakness in the economy when it cut rates last week. Although its focus is on 2015, with growth in Q4 now set to come under its 2.5 per cent forecast, the BoC has all the more reason to cut again in March,” CIBC stated in its Economic Flash report published in early February.“The downdraft from oil will indeed be significant, but overall output’s response to cheaper fuel, lower rates, and a significantly weaker Canadian dollar means that our full-year growth target for 2015 is still around the economy’s potential.”

 The report came on the heels of a similar prediction made by TD Bank, who also predicted a further rate cut to come from the Bank of Canada at its next rate announcement.

 “The Bank of Canada unexpectedly cut the overnight rate by 25 basis points in mid-January, on the negative impact of lower oil prices on inflation and the real economy. At that time, it also signaled that it saw most of the risks to inflation to be tilted to the downside,” TD’s economic update, published in late January stated. “Given our weaker oil price, inflation, and output forecast relative to the Bank, it therefore holds that we expect some of those downside risks to be realized.

 “As such, we forecast that the Bank of Canada will cut the overnight rate by an additional 25 basis points at its next fixed announcement date in March.”

 However, the Bank of Canada now believes the risks around inflation are now balanced and it deems the “current degree of monetary policy stimulus is still appropriate and the target for the overnight rate remains at 3/4 per cent.