“If the Bank [of Canada] decides to stand pat to observe the degree to which recent economic weakness is transitory in nature, the focus will turn to the forecasts within the monetary policy report, and a rate cut down the road remains entirely plausible”, Caranci said in an interview with the Globe and Mail.
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The historic decision by the U.S. Federal Reserve to raise rates was announced in December, and since then the global macro economic headwinds have picked up strength to the point where the 4 interest rate hikes are seen as unlikely with forecasts calling for 2 or 3 as it is also an American presidential election year which would limit the interventions of the central bank during key months leading up to the election. The loonie reached the cheapest since April 2003 on Wednesday before the rate announcement.
Downside risks to the Canadian economy are growing and an obvious remedy is to lower the cost of borrowing in the hope that it stimulates fresh investment.
Poloz lowered the trend-setting rate twice a year ago to 0.5 per cent to help soften the blow of sliding oil prices – and observers are divided on whether he will pull the trigger again. This is the major argument for a Bank of Canada rate cut, as the loonie is already at a level where exports should thrive.
In the short term, there is hope that a recovery in the United States – Canada’s neighbor and biggest trading partners – will bolster the Canadian economy and currency. In a report published last week, the Macquarie Capital analyst predicted low commodity prices could send investors fleeing for safer havens elsewhere.
“A further slide to $25/barrel is not a delusion but with many pundits in a race to predict more dramatic declines and the fact that this oil price demise is firmly in the mainstream media, we can not rule out a volatile short squeeze higher”, she added.
Those in favour of a cut may point to the potential impact of a lower oil price on the Canadian economy, in particular that it could lead to more layoffs in oil producing regions and that the economy could use a boost from a lower rate.
Canada’s dollar, hit hard by the fall in global oil prices, could weaken still further, even though it has already been depreciating against its USA counterpart for four-and-a-half years.
Economists have previously estimated that price parity for the Canadian dollar is around 84 cents USA, meaning that is what the loonie would have to be worth for prices to be the same in the US and Canada.
It held its overnight rate at 0.5 percent, where it has been since July. Last month, BoC Governor Poloz said “The bank is now confident that Canadian financial markets could also function in a negative interest rate environment”.
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However, some economists believe that the Canadian dollar’s sharp fall may forestall a rate cut. Moreover, there has been a renewed turmoil in the oil markets due to worries regarding China amidst crude supply glut, which will continue to keep prices subdued in the coming months. Luckily the Bank of Canada for now seems to full well understand that there is absolutely no point of intervening in the FX market to curb the loonie sell-off. And the Mexican peso has also depreciated against the US dollar.
