Scotiabank's Derek Holt questions central bank's rush to ease monetary policy
The latest real GDP figures revealed a 0.2% rise in May, following a 0.3% increase in April, and the continued growth is likely to support continued interest rate cuts by the Bank of Canada.
Most economists from Canada’s big banks believe that there will be a further rate cut in September with another likely before the end of 2024, but one prominent economist is questioning the BoC’s keenness to cut.
Scotiabank’s vice president and head of Capital Markets Economics, Derek Holt, says that the health of the Canadian economy is being talked down by “pockets of the Canadian consensus for dramatic BoC policy easing.”
“They risk pushing the Bank of Canada’s already uber-dovish Governor Macklem into committing policy error by easing too much, too soon, and in too cavalier fashion,” Holt wrote in a commentary published on Wednesday.
He restated his long-held position that easing too soon risks reigniting inflation, while the BoC’s projections for potential growth of the economy downplay weak business investment and productivity and overstates the impact of population growth on GDP: “the BoC is applying an overly aggressive translation of population growth into what it means for potential growth by treating any form of growth in population and the labour force as proportionate drivers of GDP. They are not,” Holt wrote, noting the oversized share of population growth from non-permanent immigration.
Holt’s views are based on several arguments made in his commentary, including that the markets’ belief in the dovish tone of Governor Tiff Macklem on the economy is exacerbating the risk and while he believes that mild easing of rates is appropriate, he continues to warn against going too far too soon.
Rate cuts
Among the big banks’ economists, the June guidance from Statistics Canada which suggests that the resilience in the economy may be easing, especially in manufacturing and wholesale trade, continues to point towards further cuts.
“With two interest rate cuts under its belt–and likely a couple more this year–we'd expect the growth backdrop to continue to be supported. The BoC is particularly upbeat about third quarter growth (2.8% q/q annualized), but we expect the weight of still-high interest rates to result in more trend-like growth next quarter,” said TD Economics’ Marco Ercolao.
CIBC Economics’ Avery Shenfeld expects “another quarter point rate cut by the Bank of Canada in September, with that decision being much more tied to the progress we've seen on underlying inflation measures.”
And Abbey Xu at RBC Economics says: “We think the economic backdrop should give the Bank of Canada room to deliver another interest rate cut in their next meeting in September. We expect a total of 100 basis points of cuts to the overnight rate this year (including the 50 basis points cuts already delivered in June and July).”
