Faster move to neutral rate could help Bank of Canada fend off below-target inflation
BoC likely to lower rates faster than Fed due to weak Canadian growth
Investors expect BoC policy rate to hit neutral setting in less than one year
Canadian dollar hits a two-month low amid rate-cut expectations
Adds details on jobs data, Bank of Canada survey
By Fergal Smith
TORONTO, Oct 11 (Reuters) -The Bank of Canada is likely to lower interest rates to a neutral setting that neither restricts nor stimulates its economy more quickly than the U.S. Federal Reserve, saidanalysts, who see weak Canadian growth raising the risk of a sustained drop in inflation below the central bank's 2% target.
The BoC estimates the neutral interest rate - where its policy rate settles when the economy is in equilibrium - to range from2.25% to 3.25%, with a mid-point of 2.75%. The estimate among Fed officials is similar, at 2.9%, with a central tendency estimate among policymakers in the 2.5%-to-3.5% range.
A faster move to the neutral rate could offer relief to heavily indebted Canadians. It could also weigh on the Canadian dollar, which touched a two-month low on Fridayat 1.3783per U.S. dollar, or 72.55U.S. cents.
"The BoC has more reason (than the Fed) to be in a hurry to reach its neutral rate, as slower growth in Canada implies more slack in the economy," said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.
Major central banks are now aligned incutting interest rates, but in contrast to their unified race to raise rates when inflation was a global threat theynow differ in how long and how far to take easing cycles to keep inflation in check and their economies growing.
Investors are betting it will take less than one year for the BoC to reduce its benchmark interest rate to 2.75% from thecurrent 4.25% but doubt the U.S. economy will weaken sufficiently for the Fed to lower borrowing costs to the neutral setting in the current easing cycle. 0#BOCWATCH0#FEDWATCH
Canada's economy has grown more slowly in recent quartersthan the roughly 2.4% pace the BoC sees as its potential. That has helped cool inflation, which hit 2% in August, but the central bank says additional economic slack would be unwelcome.
Data on Friday showedCanada added 47,000 jobs in September, more than expected, but a BoC survey indicatedfirms still see weak demand, leaving the market's implied chances of an unusually large half-percentage-point rate cut by the bank at its next policy decision on Oct. 23 largely unchanged at about 50%.
INSURANCE POLICY
The BoC has stuck with quarter-percentage-point moves in its first three rate cuts but analysts said the Fed's decision to begin lowering borrowing costsin September with a 50-basis-point moveraises prospects of the BoC easingin larger steps.
"We expect the Bank of Canada will cut rates by 50 basis points this month, with the domestic economy underperforming and significant challenges on the horizon," said Royce Mendes, managing director and head of macro strategy at Desjardins.
"Population growth is set to dramatically slow and the worst of the mortgage-renewal wall has yet to be felt."
Many Canadians are likely to renew their mortgages in the coming years at much higher interest rates after borrowing heavily and at rock-bottom levels in 2020 and 2021.
"Moving faster towards the neutral-rate range would be an insurance policy against inflation sustainably falling below target," Mendes said.
The potential for below-target inflation has not been lost on investors, with breakeven rates, the market's measure of expected inflation, falling further below 2% in recent months. CABEI30Y=RR
"If Canada begins to miss its inflation target to the downside, that is a scenario that would lead to significant currency depreciation because the Bank of Canada would have the green light to cut rates at a time when the U.S. isn't feeling that pressure," said Adam Button, chief currency analyst at ForexLive.
The policy game: US vs Canada https://reut.rs/3XIyaLx
Reporting by Fergal Smith; Editing by Rod Nickel and Richard Chang
Mga Kaugnay na Asset
Pinakabagong Balita
Disclaimer: Ang mga kabilang sa XM Group ay nagbibigay lang ng serbisyo sa pagpapatupad at pag-access sa aming Online Trading Facility, kung saan pinapahintulutan nito ang pagtingin at/o paggamit sa nilalaman na makikita sa website o sa pamamagitan nito, at walang layuning palitan o palawigin ito, at hindi din ito papalitan o papalawigin. Ang naturang pag-access at paggamit ay palaging alinsunod sa: (i) Mga Tuntunin at Kundisyon; (ii) Mga Babala sa Risk; at (iii) Kabuuang Disclaimer. Kaya naman ang naturang nilalaman ay ituturing na pangkalahatang impormasyon lamang. Mangyaring isaalang-alang na ang mga nilalaman ng aming Online Trading Facility ay hindi paglikom, o alok, para magsagawa ng anumang transaksyon sa mga pinansyal na market. Ang pag-trade sa alinmang pinansyal na market ay nagtataglay ng mataas na lebel ng risk sa iyong kapital.
Lahat ng materyales na nakalathala sa aming Online Trading Facility ay nakalaan para sa layuning edukasyonal/pang-impormasyon lamang at hindi naglalaman – at hindi dapat ituring bilang naglalaman – ng payo at rekomendasyon na pangpinansyal, tungkol sa buwis sa pag-i-invest, o pang-trade, o tala ng aming presyo sa pag-trade, o alok para sa, o paglikom ng, transaksyon sa alinmang pinansyal na instrument o hindi ginustong pinansyal na promosyon.
Sa anumang nilalaman na galing sa ikatlong partido, pati na ang mga nilalaman na inihanda ng XM, ang mga naturang opinyon, balita, pananaliksik, pag-analisa, presyo, ibang impormasyon o link sa ibang mga site na makikita sa website na ito ay ibibigay tulad ng nandoon, bilang pangkalahatang komentaryo sa market at hindi ito nagtataglay ng payo sa pag-i-invest. Kung ang alinmang nilalaman nito ay itinuring bilang pananaliksik sa pag-i-invest, kailangan mong isaalang-alang at tanggapin na hindi ito inilaan at inihanda alinsunod sa mga legal na pangangailangan na idinisenyo para maisulong ang pagsasarili ng pananaliksik sa pag-i-invest, at dahil dito ituturing ito na komunikasyon sa marketing sa ilalim ng mga kaugnay na batas at regulasyon. Mangyaring siguruhin na nabasa at naintindihan mo ang aming Notipikasyon sa Hindi Independyenteng Pananaliksik sa Pag-i-invest at Babala sa Risk na may kinalaman sa impormasyong nakalagay sa itaas, na maa-access dito.
