The Bank of Canada's decidedly bleak Business Outlook Survey presents a near-textbook argument from the corporate sector for another interest-rate cut. The question is whether the central bank feels inclined to listen to it just now.
The quarterly survey of business executives, published by the central bank Monday, showed that the prolonged oil slump is taking a deepening toll on the mood of the country's corporate leaders. It also shows that, increasingly, the negative impact and mounting pessimism are infecting parts of the economy beyond the resource sector.
What's more, the details press on many of the hot buttons for the bank's decision on interest rates, the next of which comes only days from now (Jan. 20). Spending intentions for new capacity and hiring are at their lowest since the Great Recession; businesses still have ample excess capacity; already-tepid inflation expectations are declining.
Falling inflation expectations and a fading horizon for the economy to absorb its excess capacity? That's pretty much the Bank of Canada's standard recipe for a rate cut. When the bank cut rates twice last year, its primary explanation was that the timing for closing the so-called "output gap" (the spread between capacity and actual production) looked unacceptably remote, and it needed to stimulate the economy to shorten that time to something it could live with. As for inflation, that's the single most important economic measure underpinning the Bank of Canada's monetary policy – officially, getting the economy on track to sustain 2-per-cent inflation is its sole policy goal.
The results of the Business Outlook Survey, then, would appear to tilt the Bank of Canada considerably closer to another rate cut when Governor Stephen Poloz and his colleagues make their decision next week. The bank's key rate is already very low, at just 0.5 per cent; but research released by the central bank last month estimated that it could push its key rate into negative territory by as much as half a percentage point before hitting an effective bottom, giving the bank more theoretical room for further cuts.
Neither the bond market nor the majority of economists expect a cut next week, but the Business Outlook Survey has made a cut look like a serious possibility at some point in the next few months. At least one prominent central-bank watcher – Merrill Lynch economist Emanuella Enenajor – is convinced that the survey seals the deal on a quarter-point rate cut next week.
"The consensus expects the BoC to stay on hold … but we don't think the governor will wait. Monetary policy operates with lags, so a near-term cut would help ease the pain further out," she wrote in a research report Monday.
Still, there were significant clues in a speech Mr. Poloz gave just last week that suggest that he's leaning away from another rate cut, at least for now. The speech argued that with the Canadian economy in the midst of a transition – away from resources and toward non-resource exports – the most effective tool to smooth the way is a flexible exchange rate. The Canadian dollar has already flexed its way sharply downward; wherever there was strength to be found within the Business Outlook Survey, it was in businesses with high exposure to export markets and the weak Canadian currency.
The currency is already doing the work of a rate cut in terms of stimulating the parts of the economy that are receptive to stimulation – and probably more effectively than another cut would, given that borrowing costs are already more than attractive. Having already cut rates twice in the past 12 months – cuts that are still working their way through the economy – Mr. Poloz looks inclined to let the currency stimulus do its work, at least for now.
Matthieu Arseneau, senior economist at National Bank of Canada, noted that despite the prevailing pessimism of the survey, most firms still expect a modest pickup in sales volumes over the next year – "suggesting that if it materialized, they could change their stance on hiring and investing thereafter." That may be enough for the central bank to wait a while longer to see how things pan out.
And the economy could very well brighten over the next few months. Commodity prices could stabilize and recover some of their losses. Demand from the much healthier U.S. economy is expected to be a catalyst for export growth, supported by the weak Canadian currency. Ottawa will soon step in with a promised major boost to infrastructure spending – a stimulus that the Bank of Canada has yet to incorporate into its economic outlook, as it prefers to await the details.
Still, observers are all too keenly aware that Mr. Poloz is the same central banker who caught them all asleep at the switch a year ago, when he announced a surprise rate cut in the face of an erosion in business sentiment that wasn't all that different to what we are seeing today. Another cut next week might not be the most likely call, but it wouldn't be unreasonable, either – and Mr. Poloz's capacity for a pre-emptive strike is now well known. Fool me twice, shame on me, right?