Bank of Canada July rate cut back on the table after GDP shocker, economists say
Tuesday, Jun. 30, 2015
Bank of Canada Governor Stephen Poloz may be more inclined to cut rates in July after GDP data came in weaker than expected. Canadian Press
Canada’s GDP took economists by surprise Tuesday with data that showed the economy had shrunk for the fourth month in a row, raising the spectre of a recession. Here’s what the economists say about the outlook for the second quarter and how the Bank of Canada might react:
Benjamin Tal, CIBC WM Economics
April’s GDP was an important one. And the -0.1% reading along with the already weak March figure probably provides the Bank of Canada with enough ammunition to cut again in July. … The reality is that the energy pain is not as front-loaded as the Bank expected and Q2 growth will be so much weaker than previously envisioned. The Bank of Canada has already demonstrated that it is willing to cut on narrow and deep damage. Accordingly, we change our call to a 25 basis point rate cut by the Bank on July 15th.
Douglas Porter, BMO chief economist
The oil shock continues to reverberate through the Canadian economy, in all its various forms. GDP came stumbling out of the gate in 2015 with four consecutive monthly declines, suggesting it will need some solid gains in the next few months just to keep it out of the red for the entire first half of the year. This latest growth disappointment — along with the rumbling uncertainty surrounding Greece — has simply cranked up the odds of another Bank of Canada rate cut at some point this year, and heaped renewed downward pressure on the Canadian dollar. We still believe that growth will recover modestly in the months ahead, keeping the BoC on hold, but would readily allow that the odds of another rate cut have just improved. That’s true even though household borrowing has started to ramp up again — Poloz just indicated this weekend that the Bank has to look past these “side effects” to the overall health of the economy and the inflation target when setting rates.
David Watt, chief economist, HSBC Bank Canada
Though we do not expect the Canadian economy to slip into a technical recession, the lack of traction in the economy and the lingering negative impact from weak oil and other commodity prices into Q2 reinforce our view that the Bank of Canada will cut rates further. We continue to look for the Bank of Canada’s overnight target rate to fall from 0.75% to 0.5% in Q3 and to 0.25% in Q4.
BofA Merrill Lynch
We continue to expect the BoC to ease this year, most likely in October. Although the July meeting would be a reasonable time to ease, Governor Poloz may hesitate to suddenly shift from optimistic to dovish, particularly in light of criticism for his surprise January cut. But what about the resultant increase in household debt? If Poloz feels the need to cut, he will. As he said at the BIS this weekend: “If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow…other issues may be subordinate and I think of them as side effects”. Prescription: another 25bps ease.
Andrew Grantham, CIBC WM Economics
The hit from oil to the Canadian economy doesn’t appear to be as “front-loaded” as the BoC and Governor Poloz had expected, with a further 0.1% decline in April GDP still reflecting weakness in the energy sector … And thus far, we are yet to see the positives that should be offsetting weakness in the energy sector … lower gasoline prices are doing little thus far to spur retail spending, while the weaker loonie is doing little to boost manufacturing.
The slight fall in GDP in April, coupled with the weak hand-off from the prior quarter, leaves us facing the probability that Q2 GDP could also be negative. That will have markets pricing in a greater probability of a BoC interest rate cut, which will weigh on the loonie and support fixed income today.
David Madani, Capital Economics
Overall, after the 0.6% annualised contraction in Q1 GDP, the incoming data suggest that the economy contracted by a similar margin in Q2, much weaker than the Bank of Canada’s forecast of positive 1.8% annualized growth. Accordingly, we now expect the Bank to cut rates by 25 basis points in July.
Jimmy Jean, Desjardins
Canada GDP disappoints once again, with a fourth consecutive decline (-0.1% vs. +0.1% consensus, -0.2% prior) and a fifth in the last six months.Details show the goods sector to be a huge drag once again :-0.8% and services doing ok :+0.3%. The energy sector is largely to blame (-2.6%), although still not seeing any semblance of a pickup in the non-energy producing sector, as mfg GDP is down again (-0.2%).
Bill Adams, The PNC Financial Services Group
The Bank of Canada seems to be willing to look through short-term trends in data, and will likely discount April’s continued decline in real GDP as long as it is reversed in following months. In any case, the Canadian dollar will be more affected this week by the “flight to quality” in global capital markets, which pressures commodity currencies like the Loonie to depreciate.