BoC rate cut no panacea, warns economist

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The urgency of dealing with the effects of global oil price crashes may trigger a rate cut, TD Bank Group vice president and Chief Economist Beata Caranci said in a statement released on Wednesday (January 13).
 
Caranci emphasized that a rate adjustment won’t serve as a cure-all for the ailing economy. In fact, all signs currently point to Canadian markets underperforming in 2016, with real GDP growth now projected to be 1.5 per cent (against the Bank’s original 2 per cent target).
 
Caranci highlighted a major contributor to the situation: a drastically weakened global oil and gas industry. Being a petro-currency, the Canadian dollar was especially affected by the continuous price crashes.
 
“Moreover, outside of the energy sector, historically low bond yields are keeping credit cheap for businesses and households,” Caranci added, bolstering her argument that a quarter-point
rate cut won’t necessarily address fundamental economic challenges.
 
With the Bank of Canada’s policy meeting set for January 20, there appears to be no consensus among market players for a rate cut, judging by Governor Stephen Poloz’s neutrally-worded speech last week.
 
However, in anticipation of further declines in the energy sector, combined with various imported financial market stresses from developing markets, a rate cut on January 20 might be prudent. Caranci noted that such a step can allow the currency to provide a level of insurance against prolonged shocks on commodity prices.
 
Overall, despite being fraught with multiple risks amid a backdrop of a struggling economy, Caranci said that 2016 may prove to be the turning point, as long as the Bank of Canada takes the lead in adopting and working with expectations consistent with a more moderate trajectory.

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