The Bank of Canada surprised no one by leaving their policy rate unchanged at 0.5%. What is catching attention is the concern about U.S. policies, the global outlook, Canadian household spending and even slow business investment. To help break down what matters to investors, Sara D’Elia speaks with Brian DePratto, Senior Economist at TD Economics.
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00:00:08.960 In their very first rate announcement of 2017, the Bank of Canada
00:00:12.190 surprised no one, leaving their policy rate unchanged at 0.5%.
00:00:16.690 What is catching attention?
00:00:18.100 It's the bank's concerns about things like US policies,
00:00:20.980 global outlooks, household spending, and even slow Canadian business investment.
00:00:25.990 To help us break down what matters to investors,
00:00:28.000 I'm joined by Brian DePratto, senior economist at TD Economics.
00:00:31.940 Now I want to start with the statement today.
00:00:34.190 You weren't calling for any type of change in rates.
00:00:36.490 But what caught your attention?
00:00:38.170 One thing that stood out for me right away, right up front in the statement
00:00:41.470 they were talking about the loonie.
00:00:42.970 They're worried about the level of the Canadian dollar versus the US.
00:00:46.420 And we know Poloz has been thinking about this.
00:00:48.717 But it's a bit unusual and a bit surprising to see
00:00:50.800 it so front and center in the statement.
00:00:53.110 The other big surprise was a little more subtle,
00:00:55.720 but the core inflation measures-- it's something
00:00:57.820 they've used as a guidepost for inflation and setting policy.
00:01:01.150 They introduced some new measures late last year.
00:01:03.460 But now they're no longer providing a forecast of those core measures.
00:01:06.910 It's a bit unusual and a bit of an odd change in my opinion.
00:01:10.550 Now when we compare what we had heard back in December, last Bank of Canada announcement,
00:01:14.680 to what we heard today, what were the notable changes for you?
00:01:17.909 One thing that stood out for me was the risks that the Bank of Canada is thinking about.
00:01:21.575 In the previous statement they were seen as roughly balanced.
00:01:24.950 Here, you have a bit more of a skewing of the risks to the downside.
00:01:27.880 You have more downside risk, and you have some new ones.
00:01:30.320 The first new one is protectionism.
00:01:32.194 I think we're all aware of the risk of protectionism
00:01:34.360 given political events south of the border.
00:01:36.460 Canada is a trading nation.
00:01:37.870 Big concern there, not surprising to see it in the statement.
00:01:41.080 The other risk relates to rising interest rates.
00:01:43.750 We've already seen this, as well, feed through as people think about US growth.
00:01:47.530 Canadian five-year bond rate, mortgage rates have both risen since the fall.
00:01:51.625 And the Bank of Canada doesn't really want to see a whole lot more of that.
00:01:54.760 They don't want a high rate policy right now.
00:01:57.100 So that's a big concern for them.
00:01:59.110 Last week we heard from the Bank of Canada.
00:02:01.000 They released their Business Outlook Survey.
00:02:03.030 And we had seen a pretty big improvement in business sentiment.
00:02:06.280 We had a big jobs report back in December with sizable gains
00:02:10.060 made in full-time employment.
00:02:11.710 But you had said that's not enough for the bank to be stirred to action.
00:02:15.100 Why not?
00:02:16.030 It's all about the context.
00:02:17.520 Business Outlook Survey was a very, very positive report.
00:02:20.680 Intentions around investment and hiring, both up.
00:02:24.070 But we are coming off of seven straight quarters, almost two years, of declining
00:02:28.060 business investment in this country.
00:02:29.830 So you're coming off a very low base.
00:02:31.510 And so the Bank of Canada is not going to want
00:02:33.426 to do anything to sort of nip that potential recovery in the bud.
00:02:36.640 Similarly on the hiring side, again, very, very strong report, very nice to see,
00:02:40.760 lots of full-time gains.
00:02:42.370 But if you look at 2016 as a whole, the majority of the gains were in part time.
00:02:46.610 And that's not always the sign of a healthy economy.
00:02:49.040 So again, a little bit of caution is warranted around those positive numbers.
00:02:53.020 And since the US election and Trump's surprise victory,
00:02:55.960 the market's been pricing in the US, from the Fed,
00:02:58.300 two to three rate hikes over the next year.
00:03:00.700 In Canada, Stephen Poloz came out today and said
00:03:03.850 a rate cut is actually on the table for us.
00:03:07.420 Is that your base case?
00:03:08.524 What do you think's going to happen with rates here?
00:03:10.690 I think ultimately, not a whole lot.
00:03:13.210 Our view is that the Bank of Canada is likely to be happy
00:03:15.730 leaving rates at half a percent, where they are right now, probably well
00:03:19.510 into late next year.
00:03:21.047 They're going to actually be pretty happy to see the Federal Reserve hike.
00:03:24.130 When you see the US rates going up and Canadian rates staying the same,
00:03:27.089 usually that puts a little bit of downward pressure on the loonie.
00:03:29.838 We know Poloz is concerned about that.
00:03:31.700 So it might be an optimal outcome for him.
00:03:34.090 That said, the risks are clearly skewed to the downside.
00:03:36.970 We saw Poloz discuss that in terms of a cut.
00:03:39.940 Should some of those risks materialize, the likely move would be a cut.
00:03:44.050 But for now, that's not our base case.
00:03:46.750 Thank you very much.
00:03:47.671 Thank you for having me.
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