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The BoC’s reduced economic forecast for 2016 remains shockingly positive

13:07 EST Wednesday, Jan 20, 2016

Bank of Canada governor Stephen Poloz held rates unchanged in what appears to be an effort to calm both currency markets and nervous Canadians.
The Canadian dollar jumped 0.8 of a cent in the minutes after the announcement, and there’s no doubt this was part of Mr. Poloz’s plan. The loonie had dropped 5 per cent in the first three weeks of 2016 – a remarkably short period of time that provided little chance for domestic consumers or businesses to adjust to the change. Furthermore, a cut in interest rates would have caused further declines in the Canadian dollar, with the risk of a subsequent rout that could have become severe as selling in currency markets gained more momentum downwards.
The Bank’s Monetary Policy Report accompanying its decision noted that economic growth had “stalled” in Canada during the fourth quarter – Canadians can expect growth domestic product growth at zero or below for the period – and a “softening” of U.S. economic growth.
Despite the North American slowdown at the end of 2015, the forecast for 2016 Canadian economic growth remains, while reduced, shockingly positive:
“Tthe Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016. The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.”
Bank of Montreal economist Douglas Porter’s reaction to the forecast was published immediately after the announcement:
“Unfortunately, we suspect that they are still a bit too optimistic on the growth outlook, given the relentless drop in commodity prices and a darkening global backdrop. Accordingly, we continue to believe that they will eventually trim rates further, revisiting the record low of 0.25% on the overnight rate. The most likely time for a move would be at the April 13th meeting.”
Mr. Porter would not be predicting an April reduction in central bank rates if he believed the domestic economy would “return to above potential growth” in the near term.
Much depends on U.S. demand for Canadian exports. The Bank noted that during the fourth quarter of 2015 “weaker-than-expected U.S. industrial production likely weighed on Canadian exports [but] many subcategories of non-energy-commodity and non-commodity goods exports— such as potash, seafood products, and ships, locomotives and rapid transit equipment—showed sizable gains during 2015.”
Despite the weak loonie, however, domestic factory activity is showing few signs of recovery. National Bank senior economist Matthieu Arseneau, writes that while November factory data was stronger than expected, “ it was the first increase in 4 months and sales remains down 3.1% since the start of 2015. … Despite November’s rebound in volume sales, the previous month’s weakness means that manufacturing is so far a drag on economic growth in Q4.”
Through no fault of his own, Mr. Poloz’s attempt to calm the waters was poorly timed – the 2016’s sharpest sell-off in global markets made success unlikely. In the next few weeks we will see if the efforts to focus on the positive bear fruit.

Loonie nears 13-year low on bets rate cut still ahead

Ari Altstedter
10:13 EST Wednesday, Jan 20, 2016

The Canadian dollar held near an almost 13-year low on speculation the nation’s central bank will reduce interest rates in coming months after keeping the benchmark unchanged in the face of sinking oil prices.
The loonie reached the cheapest level since 2003 as the Bank of Canada held its benchmark at 0.5 per cent Wednesday and said stronger U.S. demand, a weaker currency and last year’s rate cuts are leading the economy out of an oil slump. Policy makers also said the latest leg down in commodity prices was a “setback.” Traders assign about a 50 per cent chance of a reduction by April, according to data compiled by Bloomberg.
The Canadian dollar has slumped this month against most major peers as the price of crude oil, one of the country’s major exports, slid amid a global supply glut. Crude is down more than 25 per cent this year amid volatility in Chinese markets, falling close to $27 a barrel, the lowest since 2003.
“With oil at $27 a barrel it’s a really easy story to say: They didn’t cut today, they’ll have to cut later,” said Andrew Kelvin, senior fixed-income strategist at Toronto-Dominion Bank. “That’s why we haven’t seen the loonie just completely soar.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the $1 coin, weakened about 0.1 per cent to $1.4586 per U.S. dollar at 11:21 a.m. in Toronto. The currency briefly gained after the rate decision, before surrendering the advance as traders speculated the central bank will cut rates in coming months. One Canadian dollar buys about 68.50 cents (U.S.).
Traders had assigned better than a 50 per cent chance of a cut to Wednesday’s meeting.
Wednesday marked the loonie’s 14th straight daily decline, the longest losing streak since the country ended its currency’s peg to the greenback and let it trade freely in 1971.
Prices of crude oil, until last year Canada’s largest export, reached a 12-year low Wednesday on signs global oversupply won’t ease any time soon while demand may stay muted as worldwide economic growth slows.
The Bank of Canada cut interest rates twice last year, saying the economy needed help as it transitioned to non– commodity exports from oil as its main driver. A three– year slide in the loonie has helped, though the country’s manufacturing capacity still remains below its heyday as it faces stiffer competition from the likes of Mexico and China.
“The protracted process of reorientation towards non– resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions,” policy makers led by Governor Stephen Poloz said in a statement.

Bank of Canada keeps interest rate unchanged

There’s an argument to be made that Bank of Canada Governor Stephen Poloz has done enough, having already lowered the benchmark rate twice last year, in January and July, and now it’s the government’s turn to ramp up spending.
By: Canadian Press Published on Wed Jan 20 2016
OTTAWA—The Bank of Canada is holding its benchmark interest rate at 0.5 per cent even as it downgrades its growth outlook for an economy hit by falling commodity prices.
The central bank made the scheduled announcement today as the country adjusts to a complex mix of sliding resource prices, a falling Canadian dollar and weaker business investment.
There were some expectations that Bank of Canada governor Stephen Poloz would cut the rate given the poor economic forecasts.
The bank says it maintained the already-low rate because the key indicator in its decision — inflation — has been unfolding as expected within its ideal target range.
The Bank of Canada lowered its economic growth forecast — as measured by real gross domestic product — to 0.3 per cent for the final three months of 2015.
That’s down from its October estimate of 0.7 per cent.
It also downgraded its 2016 growth projection to 1.4 per cent from its fall forecast of 2 per cent.
The bank expects the economy to eventually rebound and see growth of 2.4 per cent in 2017.
The central bank says it anticipates economic benefits from the federal government’s promise to spend billions of dollars on infrastructure — but it won’t factor in the potential impact of the measures until the details have been announced.
— with a file from Bloomberg

Banks unlikely to pass on any rate cut: Analyst

Bank of Canada Governor Stephen Poloz may cut a key rate Wednesday, but don’t expect to pay less for your mortgage or auto loan.
By: Dana Flavelle Economy, Published on Tue Jan 19 2016
Don’t expect your mortgage or car loan to get much cheaper if the Bank of Canada cuts its trendsetting interest rate Wednesday, a bank analyst warns.
Canada’s major lenders are unlikely to match the central bank’s lead fully, if, in fact, Governor Stephen Poloz cuts the rate, which is still an open question, CIBC World Markets analyst Robert Sedran said in a report to clients Tuesday.
Years of record low rates have squeezed the chartered banks’ profit margins, leaving them with little room to manoeuvre, Sedran explained.
The last two times the central bank cut its rate in January and July of 2015, by 0.25 percentage points each time, most big banks trimmed their lending rates by less than half that, he noted.
Heading into Wednesday’s closely watched rate-setting meeting, the odds of a further 0.25 point cut were still seen as too close to call.
A cut would bring the bank rate back down to the record low seen after the financial crisis of 2008-09.
“If the (central) bank does decide to move another 25 basis points, we think the balance of probabilities suggests a small decline in prime from the banks (perhaps five or 10 basis points), with a non-zero probability that the banks leave their prime rates unchanged,” Sedran wrote.
“As the overnight rate gets closer to zero, margin pressure becomes more acute and especially in a year in which loan losses would appear set to begin rising, we think bankers will be — and should be — very focused on protecting their revenues.”
A growing number of private-sector economists have said they expect the central bank to lower its rate in response to deteriorating economic conditions.
Amid a glut of crude oil that has seen the global price fall by 70 per cent in 20 months and concerns about China’s slowing growth rate, Canada’s economy has displayed renewed signs of slowing.
Rate cuts normally stimulate economic activity by making borrowing cheaper, both for consumers and businesses.
However, economists have cautioned that a rate cut at this time could do more harm than good by exacerbating the Canadian dollar’s rapid decline, undercutting consumer confidence.
In a fresh warning about household debt levels, Ottawa’s Parliamentary Budget Office said Tuesday that Canadians’ household debt-to-income ratio will hit a record 174 per cent later this year, up from 171 per cent at the end of last year.
That means Canadians owe $1.74 for every dollar of after-tax income they earn. (The report used slightly different metrics than Statistics Canada, which said the ratio hit a record 163.7 per cent in the fall of 2015.)
High debt loads make Canadian households more vulnerable to negative shocks such as job losses or rising interest rates, the budget office warned.
Consumers are feeling the impact of a falling dollar at the grocery store, where $8 cauliflower has become a talking point.
As well, the falling dollar has blunted some of the impact of savings at the gas pump as crude oil is priced in U.S. currency. Refinery profit-taking has also been a factor.
The cost of spending the winter in Florida is also higher.
Prices for other goods are also expected to rise eventually as retailers pass through the higher cost of importing items priced in U.S. dollars.
At the moment, the cost of shopping in the U.S. with Canadian dollars is probably higher than buying the comparable goods in Canada, says Doug Porter, chief economist with BMO Bank of Montreal.
Poloz has recently mused on the possible use of extraordinary measures in times of economic crisis, including quantitative easing and negative interest rates.
Quantitative easing, which would see the central bank make major asset purchases, in the form of things such as government bonds, would help lower long-term lending rates. Negative interest rates would encourage banks to lend by making it costly for them to sit on their money.
The case for and against a rate cut
• The economic outlook appears to be worsening. The price of Western Canadian Select, an Alberta oil-sands benchmark, has declined by half since the central bank’s October policy update while the Canadian dollar has depreciated by about 10 per cent.
• The Bank of Canada’s latest Business Outlook Survey showed investment and hiring intentions had fallen to their lowest level since the financial crisis of 2008-09.
• Crude oil continue to fall. As an oil exporter, Canada’s economic prospects continue to weaken, especially in the oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador. A rate cut could soften the blow by providing by encouraging consumers and business to borrow and spend, thus boosting economic activity.
• The sagging price of crude has pulled down the dollar, which should help boost exports. But the positive impact on Ontario’s manufacturers is lagging the more immediate negative impact of spending cuts and job losses in the energy sector.
• Concerns about China’s slowing growth rate have put global financial markets in a tailspin. The Toronto Stock Market’s benchmark index is down nearly 8 per cent since the start of the year.
• A rate cut could further depress the dollar and undermine fragile consumer confidence.
• The Liberal government in Ottawa says it will boost spending on infrastructure in its March budget. That could give the economy the lift it needs without a rate cut. At the very least, the Bank of Canada could hold on until after the budget is released.
• It’s unclear whether the full benefit of two previous quarter point rate cuts, in January and July of 2015 has worked its way through the wider economy.
• A low Canadian dollar is providing less of a boost to exports than in the past because Mexico, a lower-cost producer, is now also a major U.S. supplier. And the Mexican peso has also depreciated against the U.S. dollar. A further rate cut won’t help.
• Rate cuts encourage consumers to load up on debt, already at record levels, leading to potential problems down the road when rates rise. At the same time, rate cuts do little to stem the bleeding in the energy sector.

Economists warn rate cut could erode confidence in loonie

16:35 EST Monday, Jan 18, 2016

A potential rate cut by the Bank of Canada this week risks undermining confidence in the Canadian dollar, some prominent Canadian economists have warned.
Never before has the loonie fallen so far, so fast, against the U.S. dollar as over the past two years.
“Currency instability has become a concern, and we think the Bank of Canada must take note,” National Bank Financial chief economist Stéfane Marion said in a report on Monday.
“In our view, the Bank of Canada would be better to keep its powder dry this month and act, if need be, after the next federal budget when it will be better able to assess fiscal support to the economy.”
Trading in overnight index swaps currently implies the probability of a rate cut at about 60 per cent when the Bank of Canada releases its monetary policy report on Wednesday.
Economists calling for the key overnight lending rate to be maintained at 0.50 per cent say additional stimulus could test consumer sentiment. A cut to 0.25 per cent as expected by the market could bring about a “runaway exchange rate,” said Avery Shenfeld, chief economist at CIBC World Markets.
“The unprecedented pace of its decline risks an even larger hit to growth by shocking household confidence,” Mr. Shenfeld said in his weekly economic commentary on Friday.
He noted that the exchange rate serves as a barometer of the economy for many Canadians.
With the cost of travelling to the U.S. suddenly prohibitive to many, and the price of cauliflower a national talking point, the currency’s withered stature is very much on the mind of the average Canadian consumer.
Over the past two years, the Canadian dollar has lost a full 25 cents in value – a downward slope unmatched in steepness, Mr. Marion said.
Certainly, a great deal of downside is to be expected considering Canada’s current economic circumstances. Prices for crude oil and other resources such as copper are sinking to multi-year lows and domestic economic growth appears to be stagnating. Meanwhile, the U.S. dollar has been gaining considerable strength against major currencies worldwide.
But the losses should have been more like 10 cents, not 25 cents, Mr. Marion said. “Is the loonie out of whack with its fundamentals? We think so.”
While there are benefits to households, most notably through lower energy prices, the rising costs of imports are also passed through to consumers, who are finding some fruits and vegetables far more expensive these days. The effect is “fast eroding standards of living,” Mr. Marion said.
Another rate cut could erode consumer sentiment, both through additional currency depreciation and for the economic adversity a rate cut telegraphs, said George Davis, chief technical analyst at RBC Dominion Securities.
“Anecdotally, we’re already seeing some signs of erosion in consumer confidence.”
On the corporate side, a depreciated currency helps the beleaguered energy sector by making exports more attractively priced, all else being equal.
A further rate cut is needed to keep the dollar low, maintaining that cushion, veteran Canadian economist Ted Carmichael said in a blog post.
He sits on C.D. Howe Institute’s monetary policy council, which called for the Bank of Canada to hold rates as they are. There are four chief economists of Canadian chartered banks on the council, all of which advised against a cut.
Mr. Carmichael’s dissent said currency fears are overblown, and the idea that the loonie has fallen too far fails to grasp the magnitude of the commodity correction.
“I don’t think many people recognize that Canada’s commodity terms of trade in January, 2016, are 28 per cent weaker than they were at the lowest point of the Great Recession of 2008-09,” he said.