Recession will drive another BoC rate cut: TD

A quarter-point cut is likely at the central bank’s next interest rate announcement on July 15

By: James Langton
July 7, 2015 July 7, 2015
09:40

With the Canadian economy likely in recession territory, another rate cut may be coming next week from the Bank of Canada, according to a report from TD Economics.

Gross domestic product growth (GDP) surprised on the downside in the first quarter (Q1), and there is a risk that this reading will be revised even further into negative territory, senior economist Randall Bartlett said in a note to investors on Monday.

Growth in April real GDP also came in below what was expected, Bartlett noted. “Combining this with the anticipated drag from the recent wildfires in Alberta, it is likely that the Canadian economy was in recession in the first half of the year,” he said.

TD forecasts that the second half of the year is also likely to be weaker than previously expected, reducing its prediction for annual real GDP growth to around 1.2% in 2015. “This would mark the weakest pace of real GDP growth outside of a recession in over 20 years,” Bartlett said.

These readings are also well below the Bank of Canada’s latest forecasts. “In the absence of another interest rate cut, this means it could take a year longer than the Bank of Canada expected for the Canadian economy to return to its trend level of output,” Bartlett said. “With this in mind, the balance of probabilities has tipped in favour of another quarter-point rate cut at the bank’s next interest rate announcement on July 15.”

If another interest rate cut comes down, TD predicts that Canadian two-year bond yields will decline by 10 to 15 basis points, causing the spread to their U.S. counterparts to widen as the U.S. Federal Reserve Board starts raising rates later this year. “This will also reinforce our view that the Canadian dollar will be sustained below 80 cents through the second half of this year,” Bartlett said.

“Looking further ahead, the yawning output gap in Canada due to the weak economic performance in 2015 has also pushed back our expectations for any future hiking cycle. We now expect the Bank of Canada to stay its hand on this front until mid-2017,” Bartlett added.