Tomorrow morning at 10:00AM, Bank of Canada will announce interest rate decision. The BOC governor Stephen S. Poloz will speak to the press at 11:15AM. Will he make the rate cut happen the third time in one year?
The markets’ guess is 50/50. My perception is that the probability of rate cut is relatively high. Here is some personal thoughts.
Firstly, it seems that Bank of Canada doesn’t care much about the depreciation of Canadian dollar. I watched his speech at the Mayor’s Breakfast in Ottawa on Thursday, January 7th, 2016. He spoke quite frankly, weak Canadian dollar will “spreads the impact of the loss of income across the entire economy, rather than leaving it just in the commodity-producing sector”, which means the BOC’s first priority is to boost the economy and save the businesses, at the cost of currency depreciation. At the same time, Canadian dollar still some room to depreciate towards its historical low of 0.6179 on Jan 21, 2002.
Data sources: Bank of England, Bank of Canada
Secondly, the CPI is still below the midpoint of the control range. Inflation is one of the four core function of Bank of Canada’s mandate. Currently the target range is 1~3%, the latest reading was 1.4, represented November 2015. Lower interest rate will push CPI go higher.
Chart source: Bank of Canada website.
Thirdly, lower rate will support the house building related industries and keep the jobs. Now house building is one of the very few industries still have some growth momentum. Although there are a lot of concerns in regards to the hot property markets in Toronto and Vancouver, but the rest of Canada are still tepid. Alberta’s housing prices decreased substantially in 2015. Affordability and debt ratio are true concerns, but are not urgent and still controllable.
Finally, lower rate will also benefit the financial industy. As the largest and most profitable industry in Canada’s economy, any policy will undoubtly consider its impact to the financial industry. Superficially, lower rate will narrow the lenders’ spread. But when we look from a broader perspective, if the lower rate will boost the economy, banks definately will be the biggest beneficiary. On top of that, according to the new rules of bank capital, most of the banks will have to raise funds from the market, loose monetary policy will help the banks to sell shares or bonds at high prices.
Absolutely there are equivalent or more reasons the Bank of Canada will not cut the rate. I just want to take a side and make the watch of tomorrow’s announcement have some excitiement.