Cautious Bank of Canada expected to contend with economic momentum

The Canadian budget released
this week added little stimulus spending, but recent signs of
economic strength and federal funds already in the pipeline have
boosted expectations that the Bank of Canada may have to shed
its doom-and-gloom outlook.

Finance Minister Bill Morneau unveiled a wait-and-see fiscal
blueprint on Wednesday with only minor new spending, but his
economic growth forecasts have already been dismissed as stale
and overly cautious after recent signs of a long-awaited pickup
in jobs and retail sales.

“(The) national economy is no longer circling the drain …
and if you thought the economy was coming back, then the case
for incremental spending must be less compelling,” Warren
Lovely, head of public sector research and strategy at National
Bank Financial, wrote on Thursday in a note to clients.

Signs of economic growth reduce the likelihood the Bank of
Canada will need to cut interest rates again, said economists,
who expect a somewhat more upbeat assessment by the central bank
when it releases its policy statement in April. The Bank of
Canada cut rates twice in 2015 as lower oil prices hit growth,
and has left rates at 0.5 percent since then.

“As much as (Bank of Canada Governor) Stephen Poloz might
like to remain dovish, he’s going to have to give a nod to the
reality that the economy is, at least for now, doing better than
they thought,” said Avery Shenfeld, chief economist at CIBC
Capital Markets.

First-quarter growth could be above 3 percent, Shenfeld
said, surpassing the Bank of Canada’s 2.5 percent forecast.

The central bank downplayed fourth-quarter strength in its
policy statement this month, pointing to “competitiveness
challenges” for exporters and subdued growth in wages and hours

Deputy Governor Lawrence Schembri had a similar message in a
speech on Tuesday and said the latest strong retail sales
numbers were consistent with the pick-up in growth the central
bank had been expecting.

But any acknowledgement by the Bank of Canada of the
stronger data is likely to be offset by its wariness about
uncertainties in U.S. trade and tax policy, economists said.

“Without any more clarification in terms of U.S. policy,
it’s very prudent for a central bank to remain cautious and
remind (investors) that we have a big downside risk to our
outlook,” said Charles St-Arnaud, senior economist at Nomura.

Poloz said in January that a rate cut would be on the table
if downside risks materialized, though economists largely expect
the next move will be a hike in the second quarter of 2018.

Shenfeld said he expected the bank to highlight the U.S.
policy risks but saw a limit to how dovish Poloz can be.

“Clearly, it wouldn’t be credible, for example, to say as
they did last October that they’re actively considering a rate
cut now,” Shenfeld said.

(Reporting by Leah Schnurr; Editing by Richard Chang)

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