Interest rates expected remain the same until 2019

By Andrew Rickard | December 05 2016 11:30AM

Interest rates will probably not change until 2019. Judging from recent comments by Bank of Canada (BoC) Governor Stephen Poloz, only a serious economic event could prompt the bank to adjust its current course.

Frances Donald, Senior Economist at Manulife Asset Management, has parsed some of the remarks Poloz made at the CD Howe Institute and other venues last week. She says there is good reason to believe the BoC is "on a prolonged hold" and that there will have to be a significant change in the economy to warrant another interest rate cut.

When Poloz said last week that “We will get home by the middle of 2018 and that’s okay," Donald interprets this as an indication that the Bank sees no further need for policy tinkering. This comment alone suggests "a long pause" from the Bank of Canada, she says.

A "significant departure"

Donald also points to a comment Poloz made in an interview with Bloomberg, whenhe suggested that it would take a "significant departure" from the current outlook to lower interest rates; throughout the rest of the day, Poloz repeatedly qualified a “significant departure” as an oil price shock similar to the one that took place in 2014 and 2015.

"Given the magnitude of that shock, I think that comment taken alone would suggest a very high bar to an interest rate cut. But what could qualify as a “significant departure” of that magnitude? In my opinion, a hard landing in Ontario and British Columbia housing markets and/or a significant trade disruption with the United States could also qualify as “significant departure” shocks," writes Donald. "Critically, both of these downside risks have a non-zero probability of materializing in 2017-2018, though neither is our current expectation. This is one reason why our base case remains a hold, but with asymmetric risk towards a cut in the coming two years."

Donald's complete analysis of Poloz’s comments is available on the Manulife Asset Management web site.