MNI INTERVIEW: BOC Has Case For No Cut This Year: Dal's McNeil

There's an outside chance the Bank of Canada doesn't cut interest rates this year and it could at least delay until the Federal Reserve moves, an economics professor who has worked with former BOC advisers and did PhD research at the central bank told MNI.

“There is definitely a chance that we don’t see any rate cuts, I don’t know that will be likely but it certainly would be possible, just because we’ve been so surprised over the past three years or so,” said James McNeil, an assistant economics professor at Dalhousie University in Halifax, Nova Scotia, when asked whether BOC would have the necessary conditions to cut this year. “It wouldn’t surprise me to get surprised again.”

Last May he correctly predicted the Bank was more likely to return to raising interest rates, a view that was at odds with investors who saw easing. (See: MNI INTERVIEW: BOC Hike More Likely Near-Term Risk: McNeil)

Governor Tiff Macklem held the key borrowing rate at the highest since 2001 at 5% Wednesday and said it's too soon to look at a rate cut even as inflation moved back within the 1% to 3% target band. Macklem told MNI he needs to see consistent progress bringing down core prices and his base case is for improvement to take place over this year. (See: MNI INTERVIEW: BOC's Macklem Says Can Move Rapidly If Needed)

WAITING FOR THE FED?

Core inflation indexes remain above 3% and officials need to see them move well below that mark before any rate cut, McNeil said.

“Supposing core was 2.8 for example, I don’t know if that would necessarily be sufficient for them to cut rates,” he said. “What they are really looking at is reason to believe there is going to be continued downward trajectory because we really do want to get to two.”

“They are just looking at the environment and saying the risks of cutting right now and potentially causing more inflation outweigh the downsides of staying tight for a little bit longer,” McNeil said.

The Bank may also need to react to more expansionary fiscal policy but that also depends on the specific measures since some may boost the economy’s performance, he said. (See MNI INTERVIEW:Spending Remains Too Hot For BOC-Ex Govt Adviser) The federal government is set to deliver a budget on April 16 including a recent expanded healthcare package the Liberals brought in to keep support for its minority government from the NDP.

Most investors see the Bank cutting rates in June and until recently a significant number saw a cut in April. Moving before the Fed could weaken the Canadian dollar and add another inflation spark, McNeil said. “It might matter when does the Fed for example start to ease, and will Canada wait for that, or will the Bank lead a little bit and risk cutting before that point?”