June 11, 2019
Canadian Imperial Bank of Commerce now expects the Bank of Canada to cut interest rates next year, albeit “reluctantly.”
CIBC senior economist Royce Mendes and his colleague Ian Pollick, head of North American rates strategy, aren't the first observers to suggest this, but they are the first among their peers at Canada's major banks.
Many market players also have been speculating about a rate cut, in Canada and by the Federal Reserve in the U.S. And Fed chair Jerome Powell has certainly left the door open to this.
All but one of Canada’s other major banks project the Bank of Canada will hold its key overnight rate at 1.75 per cent at least through the end of 2020. National Bank of Canada, in turn, forecasts two increases, each of one-quarter of a percentage point, in the second half of next year.
Mr. Mendes and Mr. Pollick said in a new report that central bank governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues probably will trim that benchmark to 1.5 per cent in the second quarter of 2020.
One-quarter of a percentage point obviously isn’t huge. But it would send a signal. And remember, many Canadians are still juggling swollen debt and would take lower interest rates whenever they could get them.
There's also the potential impact on the Canadian dollar, whose gains the central bank would like to cap as it hopes for stronger exports.
The Bank of Canada hopes exports, and the capital spending related to that, will help juice the economy next year, but "standing pat on rates as the Fed trims 50 [basis points] would likely send the Canadian dollar to firmer levels," said CIBC chief economist Avery Shenfeld.
"That, and the downside risks to global growth from trade uncertainties, would be reason enough for the Bank of Canada to offer up a token 25 [basis-point] cut next year to trim the loonie’s sails."
Here's how we get to that rate cut, according to Mr. Mendes and Mr. Pollick: They project the U.S. central bank will cut its 2.5-per-cent target for the Fed funds rate twice, each time by one-quarter of a point, later this year and again early next.
"While the Bank of Canada isn’t intrinsically tied to Fed policy, soft global growth means there’s even less reason to believe exports and associated business investment will be able to make up for slowdowns in other parts of the economy," they added.
"That’s likely to leave the Bank of Canada reluctantly joining the rate-cutting party in 2020."
Their projections for both central banks are new.
"We’ve long been in the camp that Canadian central bankers were done with rate hikes, but now see it likely that a widening output gap in 2020 will force the bank's hand to stay true to its inflation target," Mr. Mendes and Mr. Pollick said.
Stephen Brown, senior Canada economist at Capital Economics, is in CIBC's camp, though he expects the central bank to cut before this year is out.
Here's the other view, from Toronto-Dominion Bank economist Ksenia Bushmeneva, who, like many of her peers, expects the Bank of Canada to do absolutely nothing as the recent lag in economic growth fades and growth perks up.
"While the outlook is laden with significant risks, the Bank of Canada believes that 'the degree of accommodation [provided at present] remains appropriate,'" Ms. Bushmeneva said, referring to the central bank's comments.
"Thus, even as the market expectations intensify for the U.S. Federal Reserve to cut the policy rate this year, with similar, if less intense moves seen here as well, we expect the Bank of Canada to stay pat."
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