Why the Bank of Canada shouldn’t cut rates

Bank of Canada Governor Stephen Poloz

The Bank of Canada includes a few more days before its next rate of interest announcement and monetary policy report. Whether or not it decides to adjust interest rates again on April 15, the marketplace is currently biased toward another rate cut sometime in 2015.

Some of those expectations are rooted within the view that Canada has been punished with a negative terms-of-trade shock that warrants immediate action by the central bank. But Stfane Marion, chief economist and strategist at National Bank Financial, isn’t convinced.

There is no debate that Canadian commodity producers have dramatically declined recently, but Marion noticed that the weakness continues to be concentrated in energy.

Excluding energy, prices received by producers are 5.3 percent higher than this past year, with all primary sectors (forestry, agriculture and metals) showing better pricing power.

“Back in 2008-2009, Canada\’s terms-of-trade shock was generalized (a real Tsunami). This is not the situation this time around,” Marion said inside a report, noting that five provinces have already tabled budgets this year. Quebec, B.C. and Saskatchewan take presctiption track to either balance their books or create a surplus, while only Alberta and New Brunswick are showing deficits to date.

This type of environment has got the economist seeing little reason to cut rates, particularly since oil prices seem to be levelling off.

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