What will Bank of Canada do next?

One of the big questions facing the markets right now is what the Bank of Canada will do next.  One economist believes it will continue to cut.  In a new forecast the HSBC Bank PLC predicts the BOC will cut the benchmark rate again in this quarter to 0.50%, and then again in the second quarter to just 0.25%!

It was just last week that Bank of Canada Governor Stephen Poloz and his colleagues surprised the markets with a cut of one-quarter of a percentage point to 0.75 per cent, fuelling speculation that they could move again.  Mr. Poloz called the cut an “insurance policy” because of the oil price decline and that he was prepared to cut further if necessary.

The HSBC’s chief economist in Canada, David Watt said the Bank of Canada will have to “remain cautious” for the rest of the year. “The Canadian economy is going to be vulnerable through the first half of this year” he added. Before the oil downturn, economists had expected a “re-balancing” in the economy towards exports and business investment, from the consumer spending and housing action that had propelled growth. But now, Mr. Watt said, investment in the oil patch is obviously going to suffer.  Energy companies are already substantially cutting their budgets and commencing layoffs of employees.

Other economists are predicting a second rate cut from the Bank of Canada but as an example, CIBC World Markets expects only a further 0.25% cut to 0.50% and not more.  Still others, Mark Hopkins of Moody’s Analytic, expects Mr. Poloz to hold rates steady for quite some time.  “Given the offsetting impact of the exchange rate and the strength of core inflation, a second rate cut is unlikely but cannot be ruled out,” Mr. Hopkins said in a recent report that predicts the Bank of Canada will keep rates steady into next year.

With the uncertainty over interest rates, of course, come predictions for the Canadian dollar, which has suffered substantially from the drop first with oil prices and now with the latest cut by the Bank of Canada.  Those watching the market believe the Canadian dollar, which rallied over the past two days with oil, will decline further still, to somewhere in the neighbourhood of $0.75. Some economists call for a 71 cent dollar by the end of next year.

Several other central banks are slashing their rates as well – Australia is down 0.25% while Bank Reserve Bank of India, by the way, held rates steady today.

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This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.