Newspaper article The Canadian Press

Bank of Canada Caught between Optimism for Future and Today's Harsh Reality

Newspaper article The Canadian Press

Bank of Canada Caught between Optimism for Future and Today's Harsh Reality

Article excerpt

BoC caught between rosy outlook, hard facts

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OTTAWA - By almost universal agreement the Bank of Canada is expected to hold tight Wednesday and keep its stimulative policy interest rate at one per cent for the umpteenth time, but the central bank faces a dilemma.

Most of the good news on the economy is in some theoretical future and most of the bad news is happening now.

If things don't pick up soon, what the central bank might want to consider is something few thought feasible a few months ago or even a year ago - cutting interest rates, says David Madani, economist with Capital Economics in Toronto.

That is not Madani's base-line scenario, he wants to make clear. But he also doesn't rule it out.

"If there is going to be a change in interest rates, I think it's more likely it will be a cut than an increase," he says.

Madani, who is known to be bearish on the economy, sees no reason to change his mind. "Where is this growth going to come from if exports continue to (be weak) and business investment remains fairly cautious and housing is acting as a drag on the economy? That's why the Bank of Canada might have to think about supporting the economy a little bit."

The bleak viewpoint is supported by data that suggests the brutal winter can't be blamed for all that's ailing the economies of the United States and Canada.

Last week, the U.S. estimated its economy pulled back in the first quarter, a startling contraction more than three years into a recovery period. By the reckoning of some, the winter might have sliced about 1.5 percentage points off growth, which would still have left the first quarter barely above zero.

In Canada, gross domestic product growth was a bit stronger at a pace of 1.2 per cent, but still well south of the speed the central bank believes is necessary to close the capacity gap.

Jobs growth has been stagnant for months and, on Monday, the RBC manufacturing purchasing manager's index showed better weather hasn't warmed the factory sector as the index dropped for the second consecutive month to 52. …

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