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business briefing

Will Poloz cut?

A growing number of observers now believe the Bank of Canada could cut interest rates again next week as the already powerful economic storm clouds darken further.

Economists have been marking down their prospects for economic growth this year along with their projections for oil prices.

Alberta, in particular, could see another year of recession, though milder than in 2015. Of course, provinces such as Ontario and British Columbia are seen faring much better.

Remember, too, that Bank of Canada Governor Stephen Poloz has shown he can be aggressive, shocking the markets a year ago with a surprise rate cut and then following up with a second cut later in the year.

At the time, Mr. Poloz called it “insurance” amid the oil troubles, which have escalated since then.

Here’s the latest:

“Next week marks the one-year anniversary of the Bank of Canada’s shock decision to cut interest rates - i.e., a day of infamy for Canadian financial market forecasters. We now suspect that the balance of factors leans towards a third 25-basis-point rate trim at
Wednesday’s decision, bringing the overnight rate full circle to the lows reached in 2009-10 at 0.25 per cent. Such a move would be much less of a shock than a year ago, although markets are currently assuming that the extra rate cut is more likely in the ensuing meetings in March or April..” Douglas Porter and Benjamin Reitzes, BMO Nesbitt Burns

“With oil prices having declined significantly in recent months, reaching their lowest levels since 2003, and indications that growth stalled in Q4, we believe there will be further drag to growth in 2016 coming from capex and commodity-related sector. As a result, we believe that the Bank of Canada will cut its policy rate by 25 basis points to 0.25 per cent at next week’s meeting, to buy some protection against a worsening of the economic situation. The negative impact on the economy will be unambiguously negative and could be much bigger than seen before, and the delay in implementation of fiscal policy means that increased fiscal spending would not affect growth until Q3.” Charles St-Arnaud, Nomura

“We see the odds having tilted in recent days, and are now ever so slightly on the side of seeing a rate cut in January, or April at the latest. That’s not based on a recommendation to do so, as at this point, we’re concerned about risks of a runaway [Canadian dollar], believe the currency to be weak enough to do the job on the trade side, see little if any benefit in terms of generating more debt financed private sector activity, and would argue that a larger fiscal stimulus package that has the federal government do the additional borrowing/spending would be preferable for longer term financial stability. A $30-billion federal deficit, for example, would still be moderate at 1.5 per cent of GDP, but would add an additional half point of GDP to growth vs. the election platform.” Avery Shenfeld, CIBC World Markets

“If energy prices remain persistently low, one rate cut will not likely be enough to stimulate the economy back to a reasonable growth path. In that case, the BoC may adopt forward guidance later in 2016. Another possible scenario is that the federal government ramps up its infrastructure stimulus spending to provide a greater boost to the economy than initially planned.” Emanuella Enenajor, Bank of America Merrill Lynch

“Over all, the recent plunge in commodity prices has thrown a proverbial spanner in the works, with grim implications for investment and employment prospects this year. We doubt that the bank will risk waiting for the federal government to deliver its promised stimulus plan. Accordingly, we think that there is a good chance that the bank will cut its key policy rate to 0.25 per cent next week, from 0.50 per cent. And if oil prices fail to recover later this year, then we wouldn’t rule out another rate cut before year end.” David Madani, Capital Economics

Court rules in Charter case

An Ontario judge has ruled there was a breach of the Canadian Charter of Rights and Freedoms in “tower dump” production orders that required Rogers Communications Inc. and Telus Corp. to hand over the personal information of about 40,000 cellphone users to police, The Globe and Mail’s Christine Dobby reports.

Justice John Sproat of the Ontario Superior Court of Justice in Brampton issued a decision today that found the orders – which were made in 2014 but later revoked by the police after Rogers and Telus challenged them – had authorized unreasonable searches in contravention of Section 8 of the Charter.

Justice Sproat also set out guidelines in his ruling for how courts should handle requests for such orders to minimize the intrusion on personal privacy.

Food and gas pains

We’re now at about the 69.5-cent mark for the ever-sinking Canadian dollar, with projections of still further depreciation.

So it’s worth taking a closer look at the impact of the oil-loonie shock on consumers. Because what we’re saving at the gas pump, while nice, doesn’t stack up against what we’re paying for certain other products as import prices rise.

“Although pump prices are falling faster than food costs are rising, Canadians are worse off because they spend about four times more on food than on gasoline,” said senior economist Sal Guatieri of BMO Nesbitt Burns.

As of November, Mr. Guatieri noted, gas prices had fallen 11 per cent from a year earlier, thus bringing down inflation by 0.4 of a percentage point.

But food prices had climbed by 3.4 per cent, adding almost 0.6 of a percentage point.

“Food prices have likely accelerated since November (given the loonie’s further 7-per-cent slide), while the decline in gasoline prices has slowed (pump prices are now actually up from a year ago),” Mr. Guatieri said in a research note.

This all threatens to further hinder Canada’s economy amid the oil rout.

“Alongside elevated debts and job losses in the oil-producing regions, the loss of purchasing power caused by the languishing loonie means households are in no position to drive the economy,” Mr. Guatieri said.

“Exports (and possibly fiscal policy) will need to do the heavy lifting.”

The economist also noted the reverse phenomenon in the United States, where Americans have higher spending power because pump prices have declined, while food prices are “subdued” because of the stronger U.S. dollar.

Of course, as many economists have noted, a stronger U.S. economy can only benefit Canada.

The loonie touched a low point of 69.5 cents today, and a high of 69.7 cents.

This came amid another “perfect” storm for the currency, said currency strategist Adam Cole of Royal Bank of Canada in London.

It all has to do with the drop in oil prices, mounting speculation that the Bank of Canada could cut interest rates next week and “severely risk-averse” markets at this point.

“These three factors are of course not independent of each other, but the fact that BoC policy is perceived to be tightly linked to crude prices is making the relationship with [the Canadian dollar] even stronger than it has been historically,” Mr. Cole said.

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