Bank of Canada Governor Stephen Poloz’s January decision to cut interest rates in January came as a surprise to many, and a BNN report indicates that the scales may tip in the dove’s favor yet again.
Citing the economics team at Nomura, the piece says disappointing trade figures could force Poloz to cut rates again this year.
“The continued underperformance of Canadian exports is putting in doubt the BoC’s forecast that growth will improve in the second half of 2016,” Nomura Senior Economist Charles St-Arnaud said in a report called The BoC’s major exports headache
St-Arnaud pegs the probability of the Bank of Canada cutting rates this year at approximately 40 per cent, adding that those odds could go up if shipments continue to disappoint.
Poloz has long relied on non-energy exports to help get Canada out of its economic slump. The data has continued to let him down, however: figures as recent as last week showed a plunge in exports–the worst since 2009–that made the trade deficit balloon to a record $10.7 billion in Q2.
Many pundits expect Canada to piggyback on a resurgent US economy, but St-Arnaud does not see things developing that simply.
“The sensitivity of Canadian exports to US demand has diminished in the past decade,” he wrote in the report. While Nomura anticipates US imports will rise 6% in the Q3, St-Arnaud pointed out Canada is losing its competitive edge as unit labor costs rise, allowing Mexico and Asian countries to increase their share of that pie.
A cheaper loonie could help Canadian exporters, but Canadian dollar depreciation “is no free lunch”. St-Arnaud asserts that aside from being unlikely to incite significant investment in the country, a weaker loonie will dampen Canada’s overall terms of trade.
While the Nomura senior economist is expecting a rate cut, he still sees the policy tool as a double-edged sword. “The BoC should be worried if it reignites household borrowing and the housing market, while business investment is currently not very sensitive to rate cuts.”
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