Economists divided on BoC rate decision implications

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In the wake of the Bank of Canada’s announcement on Wednesday (March 9) that it would keep the overnight rate at 0.5 per cent, various economists have pointed out that a bit of optimism is warranted given the possibility of better economic growth this year.
What got economists divided, however, are the implications of the BoC’s decision, which also set the bank rate at 0.75 per cent and the deposit rate at 0.25 per cent.
According to Nomura Securities economist Charles St-Arnaud, the recent increase in volume of non-resource exports is cause for hope, as is the fact that the BoC has still to take into account the effect of the fiscal stimulus on the economy this year.
“Because of the Governor’s comments at the press conference in January, we think the BoC believes that the size of the fiscal package will be big enough to allow the central bank to remain on the sidelines. As such, we believe the BoC will remain on hold for the rest of the year,” St-Arnaud told the Financial Post.
Meanwhile, BMO Capital Markets chief economist Doug Porter agreed with the importance of non-petroleum exports, saying that recovering oil prices and other factors would help keep the rate steady for most of the year.
“The scalding housing market in some cities would be a good reason for the BoC to stay put, but they seem to have washed their collective hands on that front (“last line of defence”). Overall, while this Statement does not shut the door on another cut, it does nothing to advance the cause,” Porter added.
Capital Economics senior analyst David Madani painted a less rosy possibility of the Canadian economy barely reaching half of the BoC’s projected 1.4 per cent GDP growth in 2016.
“If the Federal stimulus plan proves too timid as we suspect, then the Bank will have no other choice but to cut rates soon thereafter. Accordingly, we still think that a rate cut next month, to 0.25%, is a distinct possibility,” Madani explained.

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