Canada's central bank will keep interest rates steady on
Wednesday, and likely through the next several months, as it waits
to see if its expectations of a stronger second half come to
fruition, economists say.
But they are split on the Bank of Canada's next move, with half
of the 10 economists at primary government securities dealers
surveyed by The Wall Street Journal expecting no change in the
benchmark rate until the end of June 2016. Two expect the bank to
raise rates once by that time, two see it cutting once in that
period, and one sees it cutting twice.
The split reflects differing views on two big issues the
country's central bank is grappling with: exactly how much domestic
damage the drop in oil prices will inflict, given that crude is
Canada's largest export; and the strength of the U.S. economy,
which will play a decisive role in determining if Canada can boost
its nonenergy exports as the bank expects.
The central bank cut its rate by a quarter percentage point to
0.75% on Jan. 21, a surprise move meant as "insurance" against the
potential impact of the sharp drop in oil prices. It kept the rate
steady at its next two policy decisions and gave limited direction
on the future direction of rates.
The bank has said there was no growth in gross domestic product
in the first three months of the year, with Bank of Canada Gov.
Stephen Poloz at one point describing the data from that period as
atrocious.
More recently, Mr. Poloz has struck an optimistic tone,
predicting the economy would rebound strongly in the second half,
after absorbing most of the negative impact of lower oil prices in
the first half—supported by a robust U.S. economy.
Most economists expect the Bank of Canada to maintain that tone
in the policy statement Wednesday.
"We don't think he'll say anything exciting. We think they will
stick to the party line, which is that the second half will be a
better place to be," said Benjamin Tal, senior economist at CIBC
World Markets.
The bank's policy statement might recognize recent uncertainties
about the U.S. economy, but remain generally optimistic for the
U.S. for the balance of the year, said David Watt, chief economist
at HSBC Canada. The U.S. takes about three-quarters of Canadian
exports, making the health of its economy key for Canada's
outlook.
The broad range of views about monetary policy in the coming
months reflects uncertainty about the oil-price impact as well as
differing opinions about Canada's ability to ramp up its nonenergy
exports, a crucial development if the burden of growth is to move
away from heavily indebted consumers to exports and business
investments.
Mr. Watt is skeptical about the strength in the U.S. economy,
observing that in only three years since 2000 has the U.S.'s
economic performance for the year as a whole outperformed the
forecasts at the end of the year. He said he expects the bank will
ultimately cut rates twice more, bringing its key rate to 0.25% at
the end of the first half of 2016.
The bank's ultimate policy goal is to bring inflation to 2% over
the medium term. Many economists don't expect inflation to be a
problem in the coming months.
"We don't see a lot of inflationary pressure over the next
couple of years," said Randall Bartlett, senior economist at TD
Bank.
Write to Don Curren at don.curren@wsj.com
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