Economists expect another BoC rate cut

Economists expect another BoC rate cut

Another drop anticipated during monetary policy announcement tomorrow


As the cliche goes: No news is good news. Sadly, there’s news as economists jostle to take a stance on whether or not the Bank of Canada will lower primary interest rates during tomorrow’s monetary policy announcement.

“Against a weakened economic outlook and a slow adjustment cycle, we expect the Bank of Canada to reduce its policy rate to 0.25% at its January 20 meeting,” states TD Economist Brian DePratto.

The rationale for this additional interest rate drop lies in sluggish oil prices and loonie strength—and the first two weeks of January weren’t kind to either. Oil prices broke below the US$30 a barrel, which prompted a further drop in the loonie to below 59-cents U.S (a level not seen since April 2003). But combine these economic headlines with the nation’s real estate numbers and it appears as if the Bank of Canada’s days of concern are not quite over.

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Canadian new home construction ended 2015 with a whimper, writes DePratto, down 18% month-on-month. The decline was due to the volatile multi-unit sector, which was down 27% for the year-end month, but don’t “place too much weight on a single month’s data [as] the shift in housing starts brings activity more in line with underlying demand,” he explains.

Still, the slowing construction sector and the tempered expectation for price appreciations in the housing resale market are taking a toll on investor outlook—and this is prompting leading economists to suggest an interest rate cut by the Bank of Canada at tomorrow’s monetary policy announcement.

At the TREB Outlook meeting on January 18, CIBC Deputy Chief Economist, Benjamin Tal, expected the Bank of Canada to cut interest rates to 0.25%—to keep the loonie’s value down, he said. “Parity with the U.S. dollar was an economic accident,” said Tal. He believes the Bank’s unofficial agenda is a weaker Canadian dollar, as this will boost trade and investment and help kickstart the nation’s economic growth.

How the Bank of Canada rate cut impacts home buyers and sellers »

Still, not all economists anticipate or recommend another drop in the BoC’s overnight rate during tomorrow’s announcement. C. D. Howe analysts believe the BoC should “keep its target for the overnight rate at 0.5%” and to “maintain it at that level for the rest of the year.” Their argument is that the rate is “appropriate for the Bank of Canada as it pursues its 2% inflation target.”

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