OTTAWA (Reuters) - The Bank of Canada is likely to sound a dovish tone but hold rates steady when it presents its quarterly monetary policy report on Wednesday, pointing to global uncertainties like Brexit and indebted consumers at home as economic risks.
While a hot housing market has helped prop up the nation’s otherwise stagnant economy, a weak Canadian dollar has failed to spur exports. The central bank will probably trim its forecast for 2016 growth, but not sharply enough to justify lowering official interest rates, economists said.
“If they cut the forecast ... as much as I think they should, it opens up the argument, ‘Why aren’t you cutting rates?’” said HSBC Bank of Canada Chief Economist David Watt. “So they will tinker but not enough to prompt the question.”
More than 40 economists polled last week by Reuters unanimously forecast the central bank would hold rates at 0.5 percent at its Wednesday meeting. It last moved in July 2015, when it cut its key overnight rate from 0.75 percent. [L4N19S3N9]
RichardsonGMP portfolio manager Hilliard MacBeth, author of “When the Bubble Bursts: Surviving the Canadian Real Estate Crash,” said the bank would “walk the tightrope” of cautioning against more debt without scaring people out of the housing market entirely.
Concerns about an overheated housing market and overindebted consumers make it hard to lower borrowing costs without goosing home prices further.
But Bank of Canada Governor Stephen Poloz can use moral suasion to warn about household debt, as he did when he warned consumers in June not to expect the housing party to go on forever. [L1N1910HF]
“I think when he talks about financial stability, one of his key targets is housing and household debt,” said BMO Capital Markets Chief Economist Doug Porter. “The two go hand in hand.”
Wednesday’s monetary policy report will probably also focus on downside risks to the economy, including Britain’s vote to leave the European Union and the U.S. economy’s failure to gather enough steam to help pull Canada out of the ditch.
Poloz has said he expected the weaker Canadian dollar to help manufacturers boost exports and rebalance the economy away from the slumping energy sector, but the revival in the factory and export sector has stalled.
“Where is the good stuff that is supposed to be stepping up (to offset energy) at this point?” HSBC’s Watt said. “I’m not seeing any.”
Reporting by Andrea Hopkins; Editing by Lisa Von Ahn