March 23, 2017 / 8:45 PM / 2 years ago

Cautious Bank of Canada expected to contend with economic momentum

OTTAWA (Reuters) - The Canadian budget released this week added little stimulus spending, but recent signs of economic strength and federal funds already in the pipeline have boosted expectations that the Bank of Canada may have to shed its doom-and-gloom outlook.

A man is reflected in a window while walking past the Bank of Canada office in Ottawa, Ontario, Canada, May 25, 2016. REUTERS/Chris Wattie

Finance Minister Bill Morneau unveiled a wait-and-see fiscal blueprint on Wednesday with only minor new spending, but his economic growth forecasts have already been dismissed as stale and overly cautious after recent signs of a long-awaited pickup in jobs and retail sales.

“(The) national economy is no longer circling the drain ... and if you thought the economy was coming back, then the case for incremental spending must be less compelling,” Warren Lovely, head of public sector research and strategy at National Bank Financial, wrote on Thursday in a note to clients.

Signs of economic growth reduce the likelihood the Bank of Canada will need to cut interest rates again, said economists, who expect a somewhat more upbeat assessment by the central bank when it releases its policy statement in April. The Bank of Canada cut rates twice in 2015 as lower oil prices hit growth, and has left rates at 0.5 percent since then.

“As much as (Bank of Canada Governor) Stephen Poloz might like to remain dovish, he’s going to have to give a nod to the reality that the economy is, at least for now, doing better than they thought,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

First-quarter growth could be above 3 percent, Shenfeld said, surpassing the Bank of Canada’s 2.5 percent forecast.

The central bank downplayed fourth-quarter strength in its policy statement this month, pointing to “competitiveness challenges” for exporters and subdued growth in wages and hours worked.

Deputy Governor Lawrence Schembri had a similar message in a speech on Tuesday and said the latest strong retail sales numbers were consistent with the pick-up in growth the central bank had been expecting.

But any acknowledgement by the Bank of Canada of the stronger data is likely to be offset by its wariness about uncertainties in U.S. trade and tax policy, economists said.

“Without any more clarification in terms of U.S. policy, it’s very prudent for a central bank to remain cautious and remind (investors) that we have a big downside risk to our outlook,” said Charles St-Arnaud, senior economist at Nomura.

Poloz said in January that a rate cut would be on the table if downside risks materialized, though economists largely expect the next move will be a hike in the second quarter of 2018. [CA/POLL]

Shenfeld said he expected the bank to highlight the U.S. policy risks but saw a limit to how dovish Poloz can be.

“Clearly, it wouldn’t be credible, for example, to say as they did last October that they’re actively considering a rate cut now,” Shenfeld said.

Reporting by Leah Schnurr; Editing by Richard Chang

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