Bloomberg News

Chances the Bank of Canada will cut interest rates in the next few months are about one in three as a weaker currency fails to boost exports and companies continue to grapple with lower oil prices, according to Eric Lascelles.

CIBC World Markets says the loonie has been overvalued by 10 per cent since the recession, which has saddled Canadians with the equivalent of a 90 basis point higher interest rate from the Bank of Canada.

“Oil’s tumble has brought the Canadian dollar down with it,” said Nick Exarhos and Avery Shenfeld, economists at CIBC World Markets. “But our currency is still richer than it may look.

The chief economist at Royal Bank of Canada Global Asset Management pegs the chance of a cut at 35 per cent and says it depends in part on whether capital-spending reductions at energy companies deepen. There’s also about a 25 per cent chance of a recession occurring this year in Canada, he said during an interview at Bloomberg’s Ottawa office.

“To the extent that we’re hearing things from oil companies, it sounds like there’s another round of capex retrenchment going on right now,” said Toronto-based Lascelles, whose firm manages $375 billion. Canada’s economy has hit a “significant air pocket,” he said.

The Bank of Canada cut its overnight lending rate to 0.75 per cent in January, calling it “insurance” against further damage from the plunge in oil prices. Lascelles says it’s still unclear whether the oil shock will be worse than the bank predicted, requiring further action.

“There’s a distinct risk that the economy undershoots their expectations again, and they deliver another insurance cut,” he said. The next rate decisions are July 15 and Sept. 9.

Trading in overnight index swaps shows there’s about a 26 per cent chance of a cut, according to Bloomberg calculations.

Canada is more vulnerable to another output contraction in the second quarter than the U.S., which can blame much of its economic weakness from January to March on a port strike and bad weather, Lascelles said. He predicts Canada’s first-quarter output growth will be about 1 per cent.

Any contraction in the second quarter would mean “it’s a pretty easy call to cut rates,” he said.

The Bank of Canada will probably stay on hold, and the economy should begin to benefit from gathering economic growth in the U.S., which Lascelles expects to expand at about a 3 per cent annual pace this quarter.

“More likely is they do manage to pause their way through,” Lascelles said of the Bank of Canada. “If they did manage to do that, then you start to revert back to the normalization arguments for the subsequent years.”

He predicts there’s a 40 per cent chance the Federal Reserve raises borrowing costs in September, 30 per cent it will happen in December and 30 per cent in 2016 or later.

 

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