RPT: MNI INTERVIEW: GDP Good Enough For BOC To Hold-Mc Mahon

(Repeats story first published Aug. 29)

The Bank of Canada will leave interest rates unchanged at its September meeting and likely through this year because even Friday's negative GDP report showed growing domestic demand that leaves the focus on keeping inflation close to target instead of fending off a recession, a former Quebec finance ministry staffer told MNI.

“I don't think the data is begging for them to do anything here,” said Sebastien Mc Mahon, also a former official Quebec’s markets regulator and now chief strategist at Industrial Alliance. “It's easy to build a story where the Canadian economy even though it won't be booming could at least for sure avoid a recession.” (See: MNI INTERVIEW: Mild Stimulus Cures Canada Recession- Ex-Clerk)

Statistics Canada reported output shrank at a 1.6% annualized pace in the second quarter, with factory exports to the U.S. slumping as tariffs took effect. Domestic demand, however, rose at a 3.5% pace with gains led by households, a good sign through a period where spending could have been hurt by the trade war and indications of a hiring slowdown. 

The GDP report also came with a flash monthly figure for July showing a rebound in growth at 0.1% after three months of declines. That won't be good enough for third-quarter growth to match the Bank's scenario for 1% growth in a situation where tariffs are little changed, Mc Mahon said, but it's sufficientto keep inflation in balance.

Headline inflation is unlikely to plunge below the Bank's 2% target in coming months, while Governor Tiff Macklem has little reason to worry core inflation running at 2.5% in recent months will heat up either, Mc Mahon said. 

COMFORTABLE STANCE

The Bank cut rates seven times in a row before holding at the last three meetings as inflation faded, and officials say elevated trade-war uncertainty means they must be less forward-looking. The overnight rate is also back at neutral at 2.75%, giving less reason to react unless the economy craters, Mc Mahon said.

“I think the Bank is pretty comfortable with its stance,” said Mc Mahon, who has attended an annual meeting of chief economists hosted by the central bank. “The Bank is kind of talking like it has done its job and it's done with this easing cycle.”

Any stimulus coming this year will be modest, he said. “We don't exclude completely the odds that we have another cut by the end of the year, maybe just like as an insurance cut.” Fiscal policy will also provide stimulus as the Bank stays on the sidelines with Mark Carney boosting spending on the military and expanding energy production, he said. (See: MNI: Carney Has Support To Break Longtime Big Project Barriers)

Some extra deficit spending will be helpful because investment remains weak and will be rattled again as U.S. President Donald Trump is expected to threaten to walk away from the USMCA as it's up for renegotiation next year, Mc Mahon said. There will also likely be volatility associated with the prospect Trump politicizes the Federal Reserve, and that would overtake the tariff story, he said. 

“I don't see a world where we end up with no free trade agreements in North America. Will we get a better deal than we have now? I don't know, maybe a little bit worse than we have now,” Mc Mahon said. "One one high conviction call that we have is to not underestimate the White House's willingness to go after the Fed."