Chances the Bank of Canada will cut interest rates in the next couple of months are about one in three as a weaker currency does not boost exports and companies continue to grapple with lower oil prices, according to Eric Lascelles.
Loonie overvalued by 10%, dragging on Canadian growth: CIBC
CIBC World Markets says the loonie continues to be overvalued by 10 % since the recession, that has saddled Canadians using the equivalent of a 90 basis point higher rate of interest from the Bank of Canada.
\”Oil\’s tumble has brought the Canadian dollar down by using it,\” said Nick Exarhos and Avery Shenfeld, economists at CIBC World Markets. \”But our currency is still richer of computer may look.\”
The chief economist at Royal Bank of Canada Global Asset Management pegs the risk of a cut at 35 percent and says it depends in part on whether capital-spending reductions at energy companies deepen. There\’s also about a 25 per cent chance of a recession occurring this year in Canada, he explained during an interview at Bloomberg\’s Ottawa office.
\”To the extent that we\’re hearing things from oil companies, it may sound like there\’s another round of capex retrenchment going on right now,\” said Toronto-based Lascelles, whose firm manages $375 billion. Canada\’s economy has hit a \”significant air pocket,\” he explained.
The Bank of Canada cut its overnight lending rate to 0.75 per cent in January, calling it \”insurance\” against further damage from the plunge in oil prices. Lascelles says will still be unclear whether the oil shock will be worse compared to bank predicted, requiring further action.
\”There\’s a distinct risk that the economy undershoots their expectations again, plus they deliver another insurance cut,\” he said. The next rate decisions are July 15 and Sept. 9.
Trading in overnight index swaps shows there\’s about a 26 percent chance of a cut, based on Bloomberg calculations.
Canada is more vulnerable to another output contraction within the second quarter compared to U.S., which could blame a lot of its economic weakness from January to March on a port strike and rainwater, Lascelles said. He predicts Canada\’s first-quarter output growth is going to be about 1 per cent.
Any contraction within the second quarter would mean \”it\’s a pretty easy call to chop rates,\” he said.
The Bank of Canada will most likely stay on hold, and the economy should begin to benefit from gathering economic development in the U.S., which Lascelles expects to grow at about a 3 per cent annual pace this quarter.
\”More likely is that they do manage to pause their way through,\” Lascelles said of the Bank of Canada. \”If they did manage to do that, then you start to revert to the normalization arguments for the subsequent years.\”
He predicts there is a 40 per cent chance the Federal Reserve raises borrowing costs in September, 30 per cent it will happen in December and 30 percent in 2016 or later.