Bank of Canada’s Stephen Poloz is in no rush to adjust interest rates, say analysts

May 20, 2016 Financial Post

By: Gordon Isfeld

OTTAWA — It’s unlikely Canada’s central bank chief will be moved very much by the latest economic data coming out of this country.

As Stephen Poloz readies himself for an interest rate decision on Wednesday, it’s unlikely economic numbers released in the past week will provide much impetus for the governor and his policy council to touch the central bank’s key lending level.

Nor is the bank expected to adjust that trendsetting interest rate in the coming months, if at all this year, given the still uncertain toll of the Alberta wildfires and lingering low energy prices.

Even the possibility of a rate hike or two in the United States before the end 2016 — a strong sign the economy of our No. 1 trading partner is picking up — won’t be enough to nudge borrowing costs in Canada, according to analysts.

“Policymakers are concerned about the slow pace of export growth and weak business investment,” said David Madani at Capital Economics.

“With the economy heavily dependent on household borrowing as a source of growth, policymakers will have no other choice but to keep interest rates low for the foreseeable future,” Madani said in a note to clients. “Although the economy grew more quickly at the start of the year and oil prices have continued to rise, so too has the Canadian dollar and, more importantly, forward looking indicators on business investment and hiring still point to sluggish economic growth this year.”

Going into their rate meeting, Poloz and his team will take note that retail sales in Canada slumped more than expected in March, the latest data available, while the rate of inflation — the central bank’s primary monetary policy concern — nudged only slightly higher in April, but remained below the central bank’s two-per-cent target and within its comfort range of one to three per cent.

The manufacturing sector, meanwhile, was also weaker but not by as much as forecasters had anticipated, according to the most recent report from Statistics Canada.

Given that weak-to-neutral environment, policy watchers anticipate a stand-pat rate decision on Wednesday, keeping the trendsetting lending level at 0.5 per cent — where it could remain well into 2017, depending on economic conditions in the United States, the direction of  global oil prices and the impact of new federal stimulus spending.

“But I think retail sales is the important economic indicator to watch — and will be going forward, as we see a bit of a shift here from fairly stronger-than-expected economic growth numbers for the first quarter, and start to see a bit of an ebb in terms of consumer activity,” said Scott Smith,  senior market analyst at Cambridge Global Payments in Toronto.

“That is a key piece to the economy because consumers have really been the ones that have driven domestic demand and held up GDP in the face of what could have been a broader slowdown, given what we saw in energy and commodity markets.”

The wildfires in Alberta have added to the economic woes in that oil-revenue dependent province. Canada’s overall output is estimated to have grown at an annualized pace of three per cent in the first-quarter of 2016, but still-low crude prices and production cuts caused by the the fires likely limited second-quarter GDP growth to one per cent, at best.

Growth in the third quarter could rebound by as much as two per cent, as Ottawa’s fiscal stimulus program starts to kick in.

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