January 22, 2015 / 1:07 PM / 3 years ago

RPT-Canada rate cut offers hope to election-bound prime minister

(Repeats for additional subscribers)

By David Ljunggren

LONDON, Ontario, Jan 22 (Reuters) - A stunning rate cut by the Bank of Canada may be the just the thing Canadian Prime Minister Stephen Harper needs to preserve a promised budget surplus as he heads into an election campaign dominated by plunging oil prices and faltering economy.

The central bank’s move to cut overnight interest rates to 0.75 percent from 1 percent - the first rate move since September 2010 - could stimulate Canada’s plodding economy and lower the government’s debt costs just enough to preserve Harper’s long-promised budget surplus.

“The symbolism of being able to campaign on a surplus is very important to the Conservatives, which is why they may go (to the polls) before October,” said Duane Bratt, a politics professor at Mount Royal University in Calgary.

“There may be a sweet spot in the fiscal year where they can say they have a surplus that may not exist in the rest of the year.”

The Conservative government, seeking a fourth straight term in this year’s election, this week said it would delay its budget until April because of financial market volatility.

The rate cut by the central bank, which sets policy independent of the government, and its statement that lower oil prices would be “unambiguously negative,” sent the Canadian dollar slumping and cast doubt on Conservative reassurances the economy was doing relatively well, but boosted odds of a federal budget surplus.

“This does improve the likelihood of the kind of outcome that the government was betting on in order to generate that budget balance,” said Michael Gregory, senior economist at BMO Capital Markets.

Whether Canadians feel confident in the economy or fearful of a looming recession could decide the federal election. While the voting is set for Oct. 19, Harper has the freedom to change the date. His office has denied persistent speculation that he’ll move the vote to April.

Indeed, Harper might benefit from a later vote, given the Bank of Canada’s new prediction that the economy will start recovering in the second half of the year, as the weaker Canadian dollar and lower energy costs boost manufacturing and exporting, offsetting the pain of the slowing oil sector.

Craig Fehr, Canadian market strategist at Edward Jones, said the rate cut will be a boon for business investment.

“The impact will be pervasive across the economy,” Fehr said. “We could see businesses become more confident, be willing to invest in future projects, expand into new markets and have the ability to access capital at low interest rates.”

Harper’s main political opponent, Liberal Leader Justin Trudeau, seized the chance on Wednesday to tell reporters that Harper had no backup plan for the economy beyond pumping oil. With the resource sector on the ropes in Harper’s stronghold of Alberta, Trudeau sees Harper’s economic leadership - long a strength for the trained economist - faltering.

A spokesman for Harper did not respond to a request for comment.

Although the Liberals are the third party in Parliament, most polls put them ahead of Harper’s center-right Conservatives and the official opposition left-leaning New Democrats, who compete for the same segment of the electorate as the Liberals.

Ipsos-Reid pollster John Wright said the Conservatives - who have been in power since early 2006 - were likely to campaign strongly on their past successes.

“The narrative will be ‘We took you through the worst recession ever ... and we came out on top. Everybody stand fast, stay the course, don’t trust other guys to run the economy,'” he told Reuters.

Additional reporting by Scott Haggett in Calgary, Susan Taylor and John Tilak in Toronto; Writing by Andrea Hopkins. Editing by John Pickering

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