Download As U.S. gets set for rate hike, Canada opts to stand pat

As U.S. gets set for rate hike, Canada opts to stand pat
By Barrie McKenna
December 3, 2015 – The Globe and Mail
Canada and the United States could soon be on
divergent interest-rate paths.
Governor Stephen Poloz and his Bank of
Canada colleagues kept the central bank’s
benchmark overnight rate unchanged at 0.5 per
cent Wednesday, extending a monetary policy
pause just as the Federal Reserve prepares to
push U.S. rates higher.
“[Monetary] policy divergence is expected to
remain a prominent theme,” the bank said in a
four-paragraph statement.
The pause – the bank’s third since the summer
– was widely expected as the country continues
to grapple with the economic hangover from
the commodities price slump and weak global
growth.
The collapse in the price of crude has given
Canada’s economy a split personality –
plunging business investment and heavy job
losses in resource-rich regions, but stable
conditions in much of the rest of the country.
Mr. Poloz’s decision to hold steady comes as
U.S. Fed chair Janet Yellen builds a convincing
case for raising U.S. rates, which have been
kept near zero since 2008. In a speech
Wednesday to the Economic Club of
Washington, Ms. Yellen cited improvements in
the job market, the prospect of higher inflation
and the dangers of delaying “policy
normalization” too much longer.
Raising rates will be “a testament … to how far
our economy has come,” she said. “In that
sense, it is a day that I expect we all are looking
forward to.”
The first U.S. rate hike in more than nine years
is widely expected at the next meeting of the
Fed’s rate-setting open-market committee Dec.
15-16.
“She [Janet Yellen] sounds ready to finally start
the normalization process but continues to
expect that tightening will be gradual,” said Jim
O’Sullivan, chief U.S. economist at High
Frequency Economics Inc.
Like Canada, much of the rest of the world
remains firmly in easy-money mode. The
European Central Bank, which meets
Thursday, is expected to keep its interest-rate
spigot wide open, by lowering rates and
extending a special €1.1-trillion ($1.6-trillion)
bond-buying program. Investors are pricing in
a 100-per-cent probability of at least a 10 basispoint cut in the deposit rate from the current
minus 0.2 per cent, according to calculations
based on ECB-dated Eonia futures.
In Canada, most economists don’t see Mr.
Poloz tightening monetary policy until late next
year or even 2017. Some even say the Bank of
Canada, which has lowered rates twice this
year, could cut again in the next few months.
“Governor Poloz is making it clear that even as
the Fed hikes, Canadian rates will be steady,”
Bank of Montreal senior economist Benjamin
Reitzes said a in a research note.
Royal Bank of Canada deputy chief economist
Dawn Desjardins said she expects the central
bank to keep monetary policy “very
stimulative” at least until investment activity in
the oil patch stops shrinking.
A diverging course of Canadian and U.S. rates
could put further downward pressure on the
Canadian dollar, now at just under 75 cents
(U.S). The target for the Federal funds rate is
now at zero to 0.25 per cent, or below the 0.5per-cent target for the Bank of Canada’s
overnight rate.
The key drivers of Canada’s economy –
commodity prices and the U.S. recovery – are
working at cross purposes. The bank said that,
while the U.S. economy is continuing to grow
at a “solid pace,” which is driving non-energy
exports, prices for oil and other commodities
have continued to weaken.
The result is that Canada’s economy continues
to face “a complex and lengthy adjustment”
from the loss of export income.
The cheaper dollar, interest-rate relief and the
stronger U.S. economy are all helping to drive
Canada’s export-led economy.
But the bank said the resource sector is still
hurting, depressing business investment and
causing “significant job losses” in resourceproducing regions.