Will they or won’t they?
With the Bank of Canada’s key lending rate already a historic low 0.5 per cent, the country’s central monetary policy-makers are facing the decision of whether to reduce further in order to stimulate the economy, or end the cycle of rate cutting that began in October.
The Bank of Canada is slated to make an announcement on interest rates Tuesday morning. The consensus of analysts polled by Reuters is that the rate will be left unchanged, which would be the first time since July last year the bank has passed on the chance to cut.
Millan Mulraine, economics strategist with TD Securities, is deviating from the majority of his peers in predicting a quarter-point reduction.
“Rates are nearing rock bottom, but given the severity of the economic contraction plus signals from the BoC, there is a case for a last rate cut of 25 basis points to leave the overnight rate at 0.25 per cent,” he wrote in a research note.
“Inflation metrics also bolster the case for further easing. Headline CPI has been below the Bank of Canada’s two per cent target since November 2008 and was most recently just 1.2 per cent [for March].”
On Thursday, the Bank of Canada will present its monetary policy report, shedding some light on the rate decision it makes two days earlier.
CIBC World Markets economist Avery Shenfeld said the central bank will downgrade its previous economic forecast for Canada, which has been widely criticized as overly optimistic. Its last report in January pegged this year’s economic shrinkage at 1.2 per cent and predicted robust growth of 3.8 per cent next year.
“Expect governor [Mark] Carney and his team to say, in effect, ‘never mind’ about what they said about a brisk economic rebound in 2010,” Shenfeld wrote in a report.
Shenfeld said the Bank of Canada overestimated the effect interest rate cuts here and abroad would have on sparking the economy.
He predicted the central bank will keep its borrowing rate at 0.5 per cent because a “further cut … would be futile on its own and would squeeze margins in the banking system.”
A key economic report for Canada this week will be February’s retail sales, being reported Thursday. TD’s Mulraine is forecasting a 0.2 per cent monthly gain, down from the 1.9 per cent rise in January.
“Canadian households appear to be facing a perfect storm as the worsening labour market conditions, lower housing and financial wealth, and tighter lending conditions have combined to push consumers firmly onto their back foot,” he said.
CIBC expects a more meagre rise of 0.1 per cent, with economist, Krishen Rangasamy, citing “weak consumer confidence and soft income growth.”