How Likely is the BOC to Hold Rates?
Canada has managed to skirt most of the recent economic crises and continue growing. But not anymore.
Despite increasing diversification of their economy, Canada is still significantly dependent on oil production and export. The sudden price shock in mid-March took a toll, as most of the world reeled from the double punch of a crash in oil stocks on top of the coronavirus pandemic.
Canada initially had relatively few cases, but that has changed recently.
Some analysts attribute the rise in the number of COVID-19 cases due to the warming of spring, further suggesting that weather plays a role in the spread of the virus.
They point to a concurrent rise in cases in Russia, which had also largely escaped infection to that point.
The BOC’s Actions
Whatever the reason for the change in the case dynamics, the BOC convened on March 27 for an emergency session to cut the rate by 50 basis points.
At the same time, they committed to not going below the new rate of 0.25%, wishing to avoid negative rates. Further stimulus measures would have to be unconventional, such as asset purchases, like most other major central banks in the world are also doing.
The BOC was late in joining the chorus of central banks cutting rates and initiating quantitative easing.
Part of that can be attributed to the slow rise in cases, which led to the hope that Canada might not have to initiate economically devastating lockdown measures. It also gave the BOC more time to have a response with more data.
What We Are Looking For
It’s no surprise then that 98% of economists in the latest survey expect the BOC to keep rates on hold.
This appears to be in line with money markets, suggesting that if the bank holds rates steady, we wouldn’t expect to see a major move in the currency.
There is one lonely economist who suggested that the BOC might cut rates by just 10 basis points. This would be a sort of a “split the difference” between cutting rates but not going to 0.
Theoretically, it’s possible, but let’s just say there’s a reason only one economist suggested it.
What Changes Can be Made
There are things that the BOC could do at the meeting to tweak the markets.
First is the guidance. They could give a specific(ish) date in which they expect to reevaluate their commitment to keeping rates at 0.25% (say, in 12 months, as the RBA did). A third of economists are skeptical the bank won’t cut to 0 in the medium term.
The other major change that is possible is the number of asset purchases. At the emergency meeting, they announced purchases of CAD5.0B per week.
If they increase the amount, it could be weaker for the looney. There is no expectation that they will reduce the amount so soon after they announced the program. So, that would be a major shock to the markets.