MNI INTERVIEW: Bank Of Canada To Cut Amid 1% Growth: Dodge

Ex-BOC Governor And Finance Official Says Trade Wars, Energy Weakness To Bring

"Reluctant" Stimulus

By Greg Quinn

     OTTAWA (MNI) - Canada's central bank may cut interest rates as an economic

slowdown takes hold and rate cuts elsewhere put upward pressure on the Canadian

dollar, former Bank of Canada Governor and top finance official David Dodge told

MNI.

     Economic growth is already slowing to as little as 1% with exports weakened

by global trade fights, hurting investment especially for producers of energy

and minerals, Dodge said.

     The Bank of Canada will look to add new stimulus as the U.S. Federal

Reserve and other central banks keep cutting interest rates, Dodge said.

Otherwise they might face an appreciation of the Canadian dollar, Dodge said,

noting that exports have already been "disappointing." Quarterly GDP growth

rates between 1% and 1.25% will turn the focus from momentum in the domestic

economy to signs of slack, leading central bank policy makers to a "reluctant"

easing, Dodge said.

     "For domestic reasons you wouldn't argue very strongly that indeed for

stimulus purposes you would need something," said Dodge, who led the BOC from

2001 to 2008. "It is very likely that we are going to see other central banks

and particularly the Fed be moving towards rock bottom rates in the rest of this

year and in 2020, which is understandable, and so it will be hard for the Bank

of Canada, simply looking at exchange rate reasons to stand too far aside from

that."

     "There will be a reluctant -- let me put it this way -- a reluctant easing

over the next little while."

     --NEED TO ENHANCE COMPETITIVENESS

     "The world for Canada is not a very wonderful friendly place with the

breakdown of the global trading order," Dodge said. "It is a very tough

environment in that regard for the country, and so, not surprisingly exports

have been disappointing," Tougher climate change policies are also a challenge

for Canada's energy producers, he said, adding that Prime Minister Justin

Trudeau's new government should refocus deficit spending on measures enhancing

competitiveness,

     Growth at around 1% would be about half the potential capacity growth rate,

Dodge said. Canada's economy expanded at a 3.7% annualized pace in the second

quarter on a temporary boost in energy production, and most economists see

growth below 2% in the second half of the year.

     "It's very hard for us to foresee anything but a bit of a widening of the

output gap over the next little while, and at some point that is going to come

home and bear on public consciousness," said Dodge, now a senior advisor at the

Bennett Jones law firm in Ottawa.

     Governor Stephen Poloz has held the key rate at 1.75% this year and will

update the BOC's view the economy is close to full capacity at the next decision

on Oct. 30. Dodge's view is in line with some investors who see a rate cut as

the global economy falters, with most of those predicting a move in the early

months of next year.

     --FISCAL PLAN

     Slower growth will also lead to another change of direction for Trudeau's

Liberals, reduced to a minority in Monday's election that requires him to seek

support from left-leaning opposition parties to pass budgets. Trudeau's fiscal

goal of lowering the debt-to-GDP ratio while running another four years of

deficits gives latitude for shortfalls of about 1% of GDP each year, Dodge said.

The emphasis should shift from running deficits for short-term priorities he

likened to "buying groceries" on credit to infrastructure and job training, he

said.

     The first fiscal plan due in the next few months will likely focus on

Trudeau's campaign promises for household tax cuts to deal with complaints about

the cost of living, Dodge said, and may avoid a major new outlay sought by

opposition New Democrats for publicly funding prescription drugs, he said. The

shift may come later as voters and politicians see the economy downshifting from

good times with consumer confidence boosted by the lowest unemployment in

decades.

     "To survive two years of very slow growth without having some plan in place

that's going to pick up growth seems to me will be very difficult," Dodge said.

"There is an air of unreality and over the next six months or so, there is going

to be a return to reality, and some of the worries that have not been there

about jobs may well come back."

     Infrastructure projects that improve job skills and expand the use of new

technologies are the best medicine for an ailing economy, Dodge said. While

global policies that are hurting trade damage Canada, the era of low interest

rates is a chance for governments to improve competitiveness.

     "On the political front in many countries we seem to be doing the most we

can to slow growth down," Dodge said. "They should be taking this opportunity to

put in place the infrastructure, whether it's to move goods, people or

electrons."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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