Another major bank joins chorus of economists predicting interest rate cut

Another major bank joins chorus of economists predicting interest rate cut

Another major bank joins chorus of economists predicting interest rate cut The Bank of Montreal updated its forecast Thursday to predict the central bank will cut its key interest rate next Wednesday when it releases its updated forecast for the economy.

The bank cited low oil prices and weakness in the Bank of Canada's recent business outlook survey among its reasons for its new forecast.

Bank of Montreal chief economist Doug Porter said the ``relentless'' decline in commodity prices has hurt the economy.

``We are far below where we were when the bank cut rates in July and associated with that decline in oil and other commodity prices we've had some disappointment in the growth numbers in Canada,'' he said.

Porter said he expects the fourth-quarter growth numbers to be ``well below'' what he and the Bank of Canada expected.

``Frankly, it is tough to look for a big snap back in the opening months of this year either, especially given what is probably happening to consumer and business confidence in recent weeks,'' he said.

The central bank's key overnight rate sits at 0.5 per cent, and expectations that the Bank of Canada will cut its rate target have been gaining momentum with the low price of oil.

CIBC chief economist Avery Shenfeld said Thursday the odds have tilted in recent days and ``are now ever so slightly on the side of seeing a rate cut in January, or April at the latest.''

TD Bank on Wednesday said it was an ``exceptionally close call'' but also predicted a rate cut.

The economy has been struggling in recent months and growth is expected to come in below the forecast made by the Bank of Canada last year.

A cut of a quarter of a percentage point would reduce the overnight rate target to a level not seen since 2010, when the economy was emerging from the financial crisis. It would also stand in contrast to a move by the U.S. Federal Reserve to raise interest rates late last year and put further pressure on the Canadian dollar.
The loonie, which has been dropping as the price of oil has fallen, broke through the 70-cent U.S. mark this week and has been trading at levels not seen since 2003.

However, despite the growing number of predictions of a rate cut, the opinion is far from unanimous.

The C.D. Howe Institute's monetary policy council recommended Thursday that the Bank of Canada keep its target for the overnight rate on hold at 0.5 per cent and maintain it there for the rest of the year.

Seven of the 11 members of the think tank's council recommended the central bank hold, while four recommended cutting the rate to 0.25 per cent.

The C.D. Howe Institute said its council members generally agreed that indicators of recent economic activity in Canada and expectations of future activity have been disappointingly subdued.

In a separate report, Desjardins senior economist Jimmy Jean noted Ottawa may be speeding up infrastructure spending plans in an effort to boost the ailing economy.

``What is shaping up is a scenario where the government picks up the baton from the central bank,'' Jean wrote in a note to clients.

``This adds to the current stimulation offered by the currency, making a sufficiently strong case for the Bank of Canada to remain on the sidelines next week.''

The Bank of Canada cut its key interest rate twice last year in an effort to cushion the impact of falling oil prices on the economy.

By cutting its target for the overnight rate, the central bank is trying to push down the interest rates charged by Canada's big banks, making it cheaper for companies to borrow money to grow their businesses.

A cut also likely means lower interest rates for variable rate mortgages, lines of credit and other loans based on the prime rate, likely to boost consumer spending.

But the banks have not passed on the full savings of the Bank of Canada's most recent rate cuts to consumers.

Craig Wong