Canada's Finance Minister Bill Morneau speaks during Question Period in the House of Commons on Parliament Hill in Ottawa, Canada, February 22, 2016.Chris Wattie/Reuters
Prime Minister Justin Trudeau's willingness to go deep into the red to stimulate Canada's moribund economy means the central bank can hold off cutting rates for the time being, according to money managers from Pacific Investment Management Co. to BlackRock Inc.
A fiscal update on Monday from Finance Minister Bill Morneau showed Mr. Trudeau's government will probably run deficits of at least $30-billion in the coming year, triple what it pledged in last summer's election campaign. Investors including Ed Devlin say deficits that size will probably deliver the jolt the economy needs and mean the Bank of Canada won't need to lower borrowing costs again after cutting rates twice last year. "The stimulus takes the Bank of Canada out of the picture," Mr. Devlin, who manages $17-billion for Pimco, said by phone from New York. The government is "probably going to do more than less."
Mr. Morneau said on Monday that crude's collapse has considerably worsened Canada's economic outlook, and the starting point for the 2016-17 deficit is now on pace to be $18.4-billion, versus the $3.9-billion gap the government predicted in November. That's even before the bulk of Mr. Trudeau's $11-billion in spending promises and any other stimulus measures are accounted for.
"Our government believes strongly that the economic downturn makes our plan to grow the economy even more relevant than it was a few short months ago," Mr. Morneau said during a town-hall meeting in Ottawa.
The Canadian dollar fell 0.5 per cent to 72.57 cents (U.S.) C$1.3779 per U.S. dollar at 10:26 a.m. in Toronto, the biggest decline in two weeks.
Bank of Canada Governor Stephen Poloz kept the benchmark rate to 0.5 per cent on Jan. 20 and said he held off from cutting it partly because he wanted to see how much fiscal stimulus Mr. Trudeau would deliver in the government's debut budget, due on March 22.
Renewed price pressure on crude oil, until last year Canada's largest export, and a slowdown in global growth has made Canada's outlook even bleaker than it was when Mr. Trudeau's Liberal Party won a majority in October. Mr. Morneau also cut the government's 2016 growth forecast to 1.4 per cent, from 2 per cent in November.
Still, derivatives trading showed the odds of a rate cut by the end of the year were still above 50 per cent, according to Bloomberg calculations on overnight index swaps. The next rate decisions are on March 9 and April 13.
"I think the bank will stay on hold," said Aubrey Basdeo, head of Canadian fixed income at BlackRock, the world's largest money manager, by phone from Toronto. "The projected spending is going to start to add to the expectation of what we already have in terms of our growth."
The Bank of Canada estimates the economy's potential growth rate before inflation kicks in to be between 1.4 per cent and 2.2 per cent. Mr. Trudeau's planned stimulus spending may be enough to get the economy back to the higher end of that range, removing the need for more rate cuts, Mr. Basdeo said.
"The spending initiatives definitely take the Bank of Canada off the table for now," Raymond Humphrey, who manages $8.5-billion (U.S.) in Canadian assets for Alliance Bernstein LP, said by phone from New York. "The willingness of the government to go into fiscal deficits in order to create a bridge between the soft patch and better long-term growth dynamics seems to be clear."