Briefing highlights
- Bank of Canada's ‘phantom rate cut’
- China's economic growth steady
0.5%
Bank of Canada overnight rate
‘Phantom rate cut’
Economists believe the Bank of Canada will try to keep a lid on the loonie when it releases its interest rate decision and monetary policy report soon.
The central bank says it doesn’t try to ‘talk down’ the Canadian dollar, which is now at about 76.4 cents U.S., but there’s plenty it could say that would have that effect.
As The Globe and Mail’s David Parkinson writes, Governor Stephen Poloz and his central bank colleagues are expected to hold their key overnight rate at 0.5 per cent, and at the same time present a dovish statement and a downgraded outlook for the Canadian economy.
So what’s their strategy?
“To sound dovish enough so that the market prices in rate cuts and the [Canadian dollar] weakens,” said Bipan Rai, executive director of macro strategy at CIBC World Markets.
“This would be akin to a phantom rate cut,” he added, a reference to how a lower currency is equivalent to easier monetary policy.
“One way the bank could do this is by emphasizing the diminishing impact of a weaker currency on exports in its forecasts and the uncertainty around the U.S. economy.”
Market players already expect the central bank to cut its forecasts for economic growth. But, said Mr. Rai, the loonie could sink if investors think the new projections are still too strong.
Mr. Rai is not alone.
“The central bank has been unambiguously dovish in its recent communications, leading markets to price some probability of interest rate cuts and the Canadian dollar to depreciate,” said National Bank senior economist Krishen Rangasamy.
Those dovish comments, though, have come amid a backdrop of stronger job and export numbers that “make it harder for the central bank to maintain its negative tone,” he added.
“The central bank will likely keep the overnight rate unchanged at 0.5 per cent, while acknowledging those improvements. But it’s unlikely to ditch the dovish language entirely given its preference in keeping the loonie grounded.”
The central bank is widely expected to cut its economic growth forecasts, even in the face of recently stronger indicators.
“While that argues for a more hawkish tone, the BoC’s forecasts for Canadian growth are already too optimistic, at 1.3 per cent year-over-year in 2016 and 2.2-per-cent growth in 2017,” Emanuella Enenajor, the Bank of America Merrill Lynch North America economist, and her colleagues Ralph Axel and John Shin said in a report looking ahead to the meeting.
Charles St-Arnaud of the Nomura economics group, for one, expects the central bank will now forecast economic growth of 1.1 per cent for this year, and 2.1 per cent for 2017, largely because of a weak second quarter.
Others have a less optimistic outlook for next year.
Remember, too, that the central bank now has a new variable, the impact of Finance Minister Bill Morneau’s new housing measures, which BMO Nesbitt Burns expects will trim economic growth by between 0.1 and 0.3 percentage point.
“The statement will again be neutral with a dovish twist,” BMO senior economist Benjamin Reitzes said of the latest decision.
“The risk for the policy outlook remains tilted toward a cut, but the bar remains high for such a move,” he added.
“The bank will be watching exports, housing, and the impact of fiscal stimulus closely over the coming months, with those three factors likely the keys for policy through at least mid-2017.”
China's growth steady
While these numbers are always in question, China’s official reading shows its economy expanding in the third quarter by 6.7 per cent from a year earlier.
That’s the same as reported for the first and second quarters.
“The official GDP figures remain too stable to tell us much about the performance of China’s economy,” said Julian Evans-Pritchard, the China economist at Capital Economics.
“Our own measure of economic activity suggests that growth actually picked up in Q3,” he added.
“But with credit growth now slowing and policy makers moving to rein in surging property prices, this recovery is unlikely to last for more than another quarter or two.”