MNI INTERVIEW: Budget Keeps Floor Under BOC Rates- Lapointe

Mark Carney's debut budget offers enough stimulus for his successor at the Bank of Canada to leave interest rates on hold next year, while leaving open some risk bond investors eventually balk at heavier borrowing plans, former finance department economist Dominique Lapointe told MNI.

Deficits of 2.5% of GDP this year and 2% in fiscal 2026 mean Governor Tiff Macklem has no need to again mark down his forecast for modest growth in coming quarters, Lapointe said, affirming the view the Bank used last week as it cut the key rate and said monetary policy is now in the right place to deal with the U.S. trade war shock. 

The Bank's implied message was "they have set the bar higher" for more stimulus, Lapointe said. "Reading between the lines," the official view is that if "you cut two times, three times more, it’s not going to make a big difference. It might inflate housing prices, which they don’t want." (See: MNI: Carney Deficits Are Bulwark Against Big Macklem BOC Cuts)

The CAD78 billion deficit is a cash record outside of Covid or a deep recession and provides more comfort to Bank officials than perhaps to bond investors, according to Lapointe.

NEXT TIME MAY BE HARDER

“International investors, they’re more sensitive to large native fiscal shocks. Today is not one, but it’s a big number and the government must keep that in mind when it wants to stay on track with how it manages its expenditures,” said Lapointe, now macro strategy director at Manulife Investment Management in Montreal. “It needs to be aware of the different environment, that if you come in with a significantly bigger number, maybe next time it’s going to be more difficult.”

The deepest tariff war with the United States since the 1930s has lifted Canada's trade deficit to a record and Lapointe said it will take five or ten years to see a payoff from the government's reallocation of money from day-to-day programs to capital investment.

“They are trying to set the level of competitiveness between Canada and the U.S. so that you don’t lose more investment,” he said. “To expand you need confidence, you need stability, and that goes even beyond what the government can do when it’s difficult to negotiate with the U.S. when the conditions and the terms change every time.”

Next year's renegotiation of USMCA is a risk to the Bank's rate path and if Donald Trump imposes a broad and permanent tariff that could require more cuts, Lapointe said. (See MNI INTERVIEW: Supply Damage Supports BOC Hold- Dal's McNeil)

NOT WORTH CUTTING

“If you get to a baseline tariff, which in our opinion there’s close to a 50-50 chance of that at the end of negotiations next year, then you’re looking at more industries being impacted,” he said.

That could mean two or three more cuts and the status of tariffs will likely be clarified around the second half of next year, Lapointe said.

Domestic demand is holding up well enough to keep rates on hold in the meantime, Lapointe said. Insolvencies are low, the housing market is rebounding and employment is still growing, he said.

“I don’t think it’s worth cutting more in that environment.”