Shifting economic conditions might lead to rate cuts

by Ephraim Vecina14 Mar 2019

Canada’s economic environment remaining in flux might lead to the BoC cutting its rates, and consequently lower mortgage rates, in the near future.

According to Gluskin Sheff + Associates chief economist and strategist David Rosenberg, this could happen soon as “we’re just basically one notch away” from recession.

“We just came off two straight quarters of negative growth in real final demand,” Rosenberg told BNN Bloomberg earlier this week.

“So, what’s the Bank of Canada supposed to do in that environment? You first move away from your tightening bias to a neutral bias, which they’ve done. Now, they’re talking, at the margin, slightly more dovishly, and the next move for an incremental central bank would be to start cutting interest rates.”

Prior to its decision to hold interest rates earlier this month, the central bank hiked its rates five times from July 2017 to October 2018.

The “stagnant” labour market will exert considerable influence, despite respectable increases in employment numbers last month.

“What’s happening here is that the focus in Canada seems to be just strictly on the pace on job creation, and nobody seems to be focusing too much on the fact that, although we’re hiring more people, we’re all basically spending less time at work,” Rosenberg argued.

“The work week was actually down 0.7% last month. If you actually look at that in body terms, it’s as if we lost 130,000 jobs just by the fact that we were working so much less.”

Read more: Flat rates might introduce worse long-term risks – observer

More importantly, other institutions will likely emulate these steps towards adapting to the shifting economic context.

Rosenberg stated that among the most important of these would be the U.S. Federal Reserve, which will possibly cut rates in the second half of 2019.

“My sense is that the Fed is going to be continuously surprised, as they already have, by the contours of U.S. economy. We bought a little bit of time, got a little bit of growth last year, because of the fiscal stimulus – that’s basically over,” he explained.

“The recessionary conditions in other parts of the world are going to hit home … My bet is that the Fed is going to be very surprised at how the weak the U.S. economy turns out this year.”

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