A patchy job market and reluctance among lenders to reduce prime rates are adding to forecasts for continued low oil prices to spur bets the Bank of Canada will cut borrowing costs again in March.
Derivatives trading indicates a better than 50-50 chance the central bank will lower its benchmark interest rate to 0.5% at the March 4 meeting, after surprising markets with a quarter-percentage point reduction last week. Governor Stephen Poloz cited the negative effect of plunging oil prices as the main reason for the Jan. 21 move.
Statistics Canada released labor-market revisions today that slashed 2014 job gains by more than a third, evidence of the employment weakness that policy makers including Poloz have said indicate “material slack” in the economy.
“Everyone is looking for another ease, but just not exactly sure at which time it will come,” Mazen Issa, senior Canada macro strategist at TD Securities in Toronto, said in a telephone interview, referring to an interest rate reduction. TD predicts the central bank will lower rates in March.
Canada’s commercial banks failed Tuesday to match last week’s 25 basis point central bank rate cut, with the six biggest lenders lowering their prime lending rate by 15 basis points. Lenders have typically matched the central bank’s changes, often almost immediately.
“This may raise the odds of a further Bank of Canada rate cut partly because transmission channels into loan pricing are not one-for-one,” said Derek Holt, vice-president of economist in Toronto, in a note to investors.
Crude Forecasts
West Texas Intermediate will remain near US$40 a barrel for most of the first half of 2015, according to Goldman Sachs Group Inc., a prediction echoed by Toronto Dominion Bank, Societe Generale SA and Bank of America Corp. WTI tumbled to the lowest since March 2009 today after the Federal Reserve maintained a pledge to be “ patient” on raising rates.
Canada, the largest crude exporter in the Group of Seven, relies on oil extraction for about 3% of its gross domestic product and on crude oil for about 14% of exports, says the Bank of Canada, which based its latest set of economic projections on oil at $60 a barrel.
Employers added a net 121,300 positions to payrolls in 2014, Statistics Canada said, down from the 185,700 reported earlier this month, and raised the unemployment rate to 6.7%, from 6.6% previously. The 2014 jobs gain was the smallest since 2009.
Accommodative Policy
“It’s consistent with them keeping policy accommodative” at the Bank of Canada, Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto, said in a telephone interview. “The bigger driver of the move by the Bank of Canada was the implications of lower oil prices.”
Some investors say Mr. Poloz will wait until after March for more evidence on oil prices before considering further action.
The job market and prime rates “are key ingredients” for the central bank, said Terry Carr, head of Canadian fixed income at Manulife Asset Management Ltd. in Toronto, which oversees about $22 billion in Canadian fixed-income assets. “There will be more to follow that will ultimately determine if another cut” is needed, he said, referring to oil prices.
“A cut in March isn’t all that likely but if things don’t firm up towards midyear then another cut will occur,” Mr. Carr said.
Still, derivatives traders are pricing in a 53% chance the Bank of Canada will lower its benchmark rate to 0.5% at the March meeting, data from overnight index swaps show. It would mark the first consecutive rate cuts since the 2008-2009 recession.
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