Stalled economic growth worries central bankers

Wednesday, July 15, 2015

Today’s cut in the Bank of Canada key interest rate comes as less of a surprise than the similar 0.25 per cent downward adjustment last January, but it accompanies more dismal projections in the quarterly Monetary Policy Report. With the overnight interest rate now at 0.5 per cent, central bankers are attempting to counter slippage in economic growth in the first half of 2015.

In January, Bank of Canada Governor Stephen Poloz projected a 2.1 per cent increase in the GDP for 2015. This has since been revised to slightly more than 1 per cent, exacerbating the potential negative impact of inflation.

“The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities,” a July 15 statement from the Bank of Canada explains. “While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment. Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.”

As with the January cut, the new reduction is unlikely to fully flow through to the banks’ lending rates. TD Bank is the first to respond with an announced 0.10 per cent cut to its prime lending rate, lowering it to 2.75 per cent as of July 16. This follows the experience earlier this year when banks generally lowered rates about 0.15 per cent in response to the Bank of Canada move.

The Canadian dollar dropped nearly a cent in value following the Bank of Canada’s announcement, registering $0.77 U.S. at midday July 15 down from $0.78 at market close on July 14.

“The economy is now operating on two distinct growth tracks: the resource track and the non-resource track,” Poloz observed. “These tracks are not independent — the cancellation of an investment in the oil patch will often lead to a hit in the manufacturing sector, for example.”

That’s also true for commercial real estate in cities like Calgary, where the oil and gas sector accounts for about three quarters of occupancy in the downtown office market. JLL recently reported 2.3 million square feet of sublease space available, and pegged 2015 average asking rents at $38.62 per square foot, down from $40 last year and $41.50 in 2013.

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