Canada Rates May Drop to Zero in 6 to 18 Months, Wolf Says

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The Bank of Canada may cut interest rates to zero in the next six to 18 months as a rising Canadian dollar threatens the recovery, according to Fidelity Investments’ David Wolf.

Rebounding oil prices have spurred Canada’s currency to the biggest rally among Group of 10 nations versus the U.S. dollar in the last three months.

Continued appreciation will endanger the non-commodity export revival central bank Governor Stephen Poloz is counting on to lead the economic recovery, and will probably prompt him to join global peers in cutting the benchmark interest rate to zero, from 0.75 percent now, Wolf said Thursday at the Bloomberg Economic Series Canada conference in Toronto.

“I wouldn’t be surprised if rates here end up where they are everywhere else in the developed world, which is basically at zero,” said Wolf, a portfolio manager in Toronto who previously worked as an adviser to former Bank of Canada Governor Mark Carney. “I’m not really thinking recession here but I’m sure thinking sluggish growth.”

The Bank of Canada next meets on May 27 to decide on interest rates.

Wolf’s prediction goes against the consensus calls of both economists and the market.

Economists see Poloz’s next move as raising rates, and have moved up their forecasts to the middle of next year from the end, according to the median estimate in a Bloomberg survey. Traders stopped pricing in a second cut this month for the first time since the central bank’s first one in January.

Mortgage Refinancing

Poloz said earlier this week the January cut was already benefiting the economy as the resulting drop in market interest rates and the currency allowed consumers to refinance mortgages at cheaper rates and would bring as much as C$20 billion in extra revenue for companies that export to the U.S. this year.

As Poloz has been sounding more optimistic in recent weeks, raising his forecasts for this and next quarter last month, both the currency and the interest rates on benchmark bonds have risen back to where they were before the rate cut.

“That rationale in terms of saying, ‘we’ve done enough because financial conditions are transmitting in the economy,’ isn’t an easy argument to make anymore,” Wolf said.

U.S. Outlook

Even in the U.S., where investors and economists widely expect a rate increase this year, Wolf says growth will probably be sluggish enough to give the Federal Reserve pause, especially as speculation for higher interest rates provide the natural break to growth that rising bond yields and currency strength have already brought to Canada the last few months.

The upshot for investors is that even after a global rout in bonds the last month that’s wiped out more than $400 billion from the market, fixed income in Canada is still looking like a pretty safe bet.

“There’s some downside in the short term sense,” Wolf said. “but the market will be self stabilizing because you’ve got a lot of demand for bonds, you’ve got not a lot of supply of bonds, and you’ve got an economy globally that can’t take a big back up in rates.”