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With Ottawa in crisis, focus is on rate cuts
HEATHER SCOFFIELD AND RICHARD BLACKWELL
December 4, 2008
OTTAWA, TORONTO -- Pressure for aggressive interest rate cuts is mounting quickly, especially now that the political crisis has overshadowed stimulus measures and the outlook for the Canadian economy is deteriorating.
"I think they have not yet done enough in Canada," both on the interest rate front and on the fiscal stimulus front, said Dale Orr, chief economist at IHS Global Insight Canada.
He would like to see the federal government speed up infrastructure spending and quickly craft a stimulus package, but he's not holding out much hope for the political scene to stabilize soon.
In the meantime, he wants to see a half-percentage-point cut next Tuesday by the Bank of Canada, followed by further cuts in January. He can even envisage interest rates falling to 1 per cent, the lowest in the Bank of Canada's history.
"You've really got to get going here," Mr. Orr said.
Markets are pricing the possibility of a steep rate cut of three-quarters of a percentage point next week.
And both Bank of Nova Scotia and Toronto-Dominion Bank have revised their interest rate forecasts in the past few days, projecting the Bank of Canada will slash its key interest rate by half a percentage point both next week and in January. TD sees interest rates declining from today's 2.25 per cent to bottom out around 1.25 per cent while Scotiabank sees interest rates bottoming out at 1 per cent.
The lowest the Bank of Canada has ever set its key rate is 1.12 per cent in 1958, although rates were set differently then. Under the current system, rates have only fallen as low as 2 per cent in 2002 and 2004.
While business executives also expect a substantive rate cut, many say they don't think it will do much for the economy in the short term.
"I don't think it's going to have any impact," said Peter Blake, chief executive officer of Ritchie Bros. Auctioneers Inc. in Vancouver. "There's too much turmoil for it to have any meaningful [effect]."
Mr. Blake said it is far more important for the political situation in Ottawa to stabilize, so there is someone in charge and key economic decisions can be made.
William Anderson, CEO of Toronto mining exploration firm First Nickel Inc., agrees that the stalemate in Parliament "puts a cloud over everything" because of the lack of stability. Consequently, a rate cut - even a big one - "won't make any difference. ... The system is frozen right now."
A half-point cut should help reduce borrowing costs for businesses and consumers, while aiding manufacturers by putting some downward pressure on the dollar, said Mike Barry, chief financial officer at Vecima Networks Inc. in Victoria. Still, he added, "I don't think it will do much in the next three months, but over the longer term it certainly will."
While a rate cut "will get lost in the noise," it is still "valuable and necessary," said Colin Macdonald, CEO of Clearwater Seafoods Income Fund. Anything that will help add some liquidity to lending is a benefit, he said.
Bank of Canada Governor Mark Carney has already indicated rates are set to fall, and that his most recent forecast in October, for 0.6 per cent growth for Canada's economy, is already out of date and too optimistic.
But some private sector economists feel he should have acted sooner to cut rates, especially since inflationary threats have all but disappeared.
"A strong case can be made for them to have started earlier, and to have acted more aggressively than they have," said Millan Mulraine, economic strategist at TD Securities.
The pressure to cut rates stems partly from the realization that the sagging Canadian economy can't depend on Ottawa for help right now, he said, but it also stems from Canada's deteriorating economic prospects.
Still, Canada's central bank has not been caught nearly as off guard as central banks in Europe and Australia, said Pierre Siklos, professor of economics at Wilfrid Laurier University in Waterloo, Ont. There, central banks have been slashing interest rates frantically, but are still nowhere near as low as in North America.
Plus, the Bank of Canada has already cut rates by three-quarters of a percentage point in October, and it still remains unclear whether Canada will topple into a serious recession, he adds.
