Posted on April 13, 2015

The Bank of Canada Watchful Waiting

 The post-meeting press conference and the April Monetary Policy Report (MPR) will take a guarded tone of continued unease.

First quarter economic growth has been well below the 1.5 percent pace forecast in the January MPR and a downward revision is expected, but what they do with the Q2 and Q3 forecasts will be revealing. The Governor has suggested that we will be seeing a helpful transition towards growth in exports and capital spending by non-energy producers—both boosted by the swooning Canadian dollar. But exports, which were doing well last year, have sagged in 2015, while cap-ex still seems to be weak. My best guess at this stage, is that the Bank will be impelled to cut rates once again later this year as the hoped-for rebound disappoints.

This, as always is data dependent, and hinges largely on what happens in the U.S. If the Canadian economy’s revival is anemic, monetary stimulus will be the only option. Next week’s budget will show that the feds have no stomach for fiscal stimulus. And incoming economic data from China suggest a global slowdown in demand for energy and other resources. Oil prices have popped in recent days, now trading at $52 a barrel (WTI), but that is likely to have only a short-term positive impact on the Canadian dollar. Friday’s jobs report for March was encouraging, another factor reducing the chances of a BoC rate cut this week, but near-term, incoming data will likely confirm continued weakness in manufacturing, particularly autos, and only a sluggish rebound in dismal retail sales.

The Canadian economic outlook remains murky and the tone of the Bank’s policy statement and MPR will continue to be cautious. Financial conditions are, however, very accommodating as the Canadian dollar and longer-term interest rates are below levels posted earlier this year. On balance, the Bank will likely continue to suggest that the output gap will close (the economy will reach full employment) towards the end of 2016 and maintain vigilant observation.