HSBC’s Watt Leads Call for Canadian Cut After Missed ChanceAri Altstedter and Cecile Gutscher
For David Watt, the Bank of Canada missed a chance to fortify the economy against the collapse of oil prices when it refrained from cutting interest rates this month. They’ll make up for it next month, he says, and he’s not alone.
Governor Stephen Poloz, who unexpectedly cut rates in January, will ease again by mid-year, according to the median estimate of a Bloomberg survey of economists conducted March 6 to March 11. Watt, chief economist at the Canadian unit of HSBC Holdings Plc. and among the most bearish Canadian forecasters, expects a 25 basis-point cut next month to 0.5 percent, and another in May. That would put borrowing costs at the lowest since 2010.
“The realization will be, we should have done what we can to backstop business confidence when we had an earlier opportunity,” Watt said. “You just get another month where businesses get somewhat more cautious and business investment plans get delayed further.”
The Bank of Canada left rates at 0.75 percent March 4, saying it was waiting to assess the impact of the January cut, which it called insurance against the decline in prices for oil, the country’s largest export. Since then, crude has resumed a drop to an almost six-year low, and data from February showed the decline is already costing the country jobs.
“The Bank of Canada needs to take out more insurance,” Watt said by phone Friday from Toronto.
The market is starting to agree with him. The probability for a rate cut on April 15 increased to 35 percent on Friday from 25 percent at the start of the week as oil fell and the country reported 1,000 jobs lost nationwide in February. The Canadian dollar fell to an almost six-year low. It was little changed at C$1.2778 per U.S. dollar at 7:56 a.m. in Toronto.
The central bank has said it’s counting on exports and business investment to take over from debt consumers as Canada’s main economic driver, and Friday’s jobs numbers suggest that isn’t happening, even with the currency’s 20 percent decline over two years and a strengthening U.S. economy.
By industry, the biggest job losses nationally were the 19,900 in manufacturing, followed by the natural resource sector. Alberta, home to the bulk of Canada’s oil production, posted a 14,000 decline in employment.
“You’d hope over time the currency’s depreciation would boost manufacturing,” Emanuella Enenajor, senior Canada economist at Bank of America Merrill Lynch, by phone from New York. “We’re seeing it in activity, we’re not seeing it in hiring.”
Enenajor is one of 10 other economists surveyed expecting another rate cut, while seven others see no cut. Until January, economists had only disagreed on how long the Bank of Canada would wait to start raising rates back to pre-crisis levels, not whether it would raise rates at all.
Odds the Bank of Canada would cut again had climbed to as high as 80 percent, according to trading in overnight index swaps, before Poloz changed the tone of his remarks Feb. 24, saying in London, Ontario, that the January easing buys time.
The yield on Sept. 15 banker’s acceptances, a gauge of short-term interest rate expectations, ended the week five basis points lower at 0.85 percent. They touched a low of 0.67 percent on Feb. 20.
“I have some reservations around a second-quarter rebound. It’s going to take more time for growth to rebound,” Thomas Costerg, an economist at Standard Chartered Bank, said by phone from New York Friday.
Like HSBC’s Watt, Costerg sees two more rate cuts needed to revive a flagging economy. He predicts one in April and one in July.
“There was almost no growth in private-sector jobs,” Costerg said following the jobs report. “The January surprise rate cut was driven by the oil drop. The April cut will be driven by deterioration in the data.”