Canadian economy expected to gather steam, keeping BoC at bay in 2020: Reuters poll

[January 17, 2020]  By Mumal Rathore

BENGALURU (Reuters) - A revival in the Canadian economy may already be underway, according to a Reuters poll of economists, who were mostly confident a rate cut was not needed and so predicted monetary policy would remain unchanged this year.

Nearly 70%, or 27 of 39, economists who provided a year-end outlook expected the central bank to keep its key interest rate on hold at 1.75% this year, compared with just over half, or 16 of 31, in a poll taken before the previous meeting in early December.

All but one respondent in the latest poll expected rates to remain unchanged when the BoC meets on Jan. 22, in line with the futures market's view.

Optimism among economists was partly driven by a trade agreement signed by China and the United States this week after an 18-month trade war and by the latest labour market data, which showed more jobs than expected were added in December.

"The BoC should be encouraged by the rebound in employment, remaining in a data-dependent mode and unlikely to cut rates in 2020," noted Veronica Clark, an economist at Citi in a research report.

"The December rebound in jobs is an encouraging sign that early-Q4 weakness apparent in recent data releases is temporary."

The Jan. 13-16 poll of over 40 economists predicted the economy would grow at an annual rate of 1.6% this quarter after expanding 0.8% last quarter.

It was expected to grow 1.7% every quarter after that until the second quarter of next year. More than 85% - 18 of 21 - respondents said the recent economic slowdown in Canada was temporary. A majority said the economy's revival was already underway.

"We are still subject to the winds of what's going on globally. If the global economy is able to hold up in the course of this year, we would likely to do the same," said Benjamin Reitzes, senior economist at BMO Capital Markets.

The Canadian flag is seen on top of a flagpole in the midst of high-rise buildings in the financial district of Toronto April 3, 2009. REUTERS/Mark Blinch/File Photo

"I wouldn't expect particularly strong growth in Canada, but we should hang in there if the global economy does as well."

The jobless rate was predicted to average 5.8% from next quarter through to mid-2021 -- the forecast horizon - a touch below the 5.9% forecast in an October poll. It averaged 5.7% last quarter.

Inflation was expected to remain below the central bank's target of around 2%, averaging 1.9% this year and next year.

That inflation outlook should keep the Bank of Canada on the sidelines this year, where it's been since October 2018, even when the U.S. Federal Reserve and European Central Bank eased policy.

Nearly three-quarters of respondents, or 17 of 23, said the Canadian economy does not need an interest rate cut before the end of 2020. That is a shift from a survey last month where economists split almost evenly on whether a rate cut was needed.

"The economy would need to go through a severe unexpected negative shock to seriously consider policy rate cuts," said Sebastien Lavoie, chief economist at Laurentian Bank.

"In the context of a muddling through economy, the bar remains high for the BoC to embark on a new round of easing or tightening."

(Reporting and polling by Mumal Rathore; editing by Larry King)

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