Bank of Canada risks being too optimistic, some economists warn

By Andrea Hopkins
TORONTO, May 26 (Reuters) - The Bank of Canada is being
overly optimistic in counting on an economic rebound that is
unlikely to come, raising the risk policymakers will be forced
to cut rates before year end, some market players warned on
Thursday.
In holding rates steady on Wednesday, the Canadian central
bank pointed to expectations for a return to solid U.S. growth
and a bounce back in third-quarter Canadian growth.
But structural change means Canada no longer gets as much
traction from U.S. demand that it once did, said David Madani,
economist at Capital Economics, who added that a lack of
business confidence and a flagging housing market point to a
September rate cut.
"The economy will be lucky to grow by one percent this
year," said Madani. "It is wishful thinking that the economy is
going to rebound strongly."
Most analysts polled by Reuters expect the next Bank of
Canada move to be a hike, not a cut. CA/POLL Overnight index
swaps imply just a 5 percent chance of a rate cut this year.
BOCWATCH
But the central bank proved itself willing to surprise with
a January 2015 rate cut almost no one saw coming. At the time,
Governor Stephen Poloz said the benefit of acting swiftly
"outweighed the costs of any short-term market volatility."
While he eschews forward guidance, Poloz said in April the
bank would probably have considered cutting rates again, if not
for fiscal stimulus pledged by the new Liberal government. Many
took that as a sign the bank would stay on the sidelines.
But David Watt, chief economist at HSBC Bank of Canada, said
the central bank will have to cut rates before year end because
counting on the United States, Canada's largest trading partner,
to pull the economy out of the ditch no longer works as it once
did.
"We're more than 18 months into the decline in oil prices,
and four years into a weaker Canadian dollar, and we don't seem
to see the manufacturing sector improving," Watt said.
Standard Chartered (LON:STAN) Bank senior economist Thomas Costerg, who
correctly forecast the January 2015 cut, noted Poloz had been
vindicated by subsequent data and predicted another easing this
year.
"Poloz is not a big fan of forward guidance, so he will
react to the data," Costerg said. "I don't think we should
expect the bank to send dovish signals before then."