TD Bank’s chief economist says the Bank of Canada is likely to wait until July before cutting interest rates, despite many other economists calling for a cut at the bank’s next meeting in June.
“Markets are split on whether the Bank of Canada will cut interest rates in June. We think more likely July for the simple fact that it gives them a bit more time to observe what's happening on the inflation side,” Beata Caranci told BNN Bloomberg in a Tuesday interview.
“I say that because we had three good months in the U.S. where everybody was really optimistic that inflation was coming down swiftly and the U.S. Federal Reserve would be in a position to cut as early as the summer… those are now gone.”
Caranci said she thinks Canada’s central bank will continue to be cautious about moving too early on cuts in case inflation proves stickier than expected, adding that they can afford to stay on the sidelines for now.
“They may want to (cut) in June, but they do have to be mindful that if they go too early and inflation backs up, that would be considered a policy error,” Caranci said.
“They already have an issue in credibility, so they definitely don't want to go down that route.”
Caranci’s comments came after Statistics Canada released preliminary Gross Domestic Product (GDP) data Tuesday morning that suggested Canada’s economy flatlined in March, and grew just 0.2 per cent in February.
The data fuelled bets that a June rate cut could be imminent, and some economists said that if cuts are delayed beyond then, Canada’s economy could go into a recession.
Caranci said that whenever the Bank of Canada does decide to cut rates, they’ll have to be mindful about how much they diverge from the U.S. Federal Reserve, which isn’t expected to cut until the fall.
She warned that if the Bank of Canada is too aggressive with cuts this year and the Fed decides to stand pat, it could put significant downward pressure on the loonie.
“The currency has been pretty range bound between US$0.71 and US$0.77 for a long time… I think if you start to spread out at 150 or 175 basis points to the Federal Reserve, you’re probably looking at a sub-70-cent (Canadian) dollar,” Caranci said.
She said that while the Bank of Canada doesn’t specifically target currency, it will have to consider how a weakened loonie will impact imported inflation from the U.S. as well as overall investor confidence.
“They're going to have to walk the line,” Caranci said.
“I don't think it necessarily changes their start date on when they start cutting, but it definitely changes the speed at which they go, so they'll have to go slower than they probably would prefer.”