Bank of Canada could slash interest rates in a big way next year
John Shmuel Nov 9, 2011 – 4:10 PM ET | Last Updated: Nov 10, 2011 2:06 AM ET
As the nail biter in Europe continues this week, two economists are predicting the Bank of Canada will move to cut rates in a big way next year.
Sheryl King, an economist at Bank of America Merril Lynch, said in a note that the volatility hitting Europe and the risk of damage to the global economy means the Bank of Canada will move to cut its benchmark interest rate to ward off the risk of recession. Her prediction is the cut will be a whopping 0.75% decrease from the current rate of 1%.
“With the Eurozone sovereign debt and banking crisis showing no sign of containment, we think the Bank of Canada will cut rates back to the effective lower bound of 25 basis points (0.25%) early next year,” she said.
Ms. King forecasts that the cut would come in two phases, with a 0.50% trim being announced during the bank’s January 17 meeting, while the second and final 0.25% cut coming during the March 8 meeting.
Also predicting a lower interest rate next year was David Madani, Canada economist at Capital Economics. He is forecasting a more mild cut of 50 basis points, however, saying he expects it to occur in April or June.
Either way, Mr. Madani said he expects interest rates in Canada will remain low for some time.
“The Bank might communicate that its policy rate will remain at 0.50% for a lengthy period of time, conditional on its projected outlook for consumer price inflation,” he said, in reference to the Bank of Canada’s target of 2% annual inflation.
“Even if we are wrong, the broader message remains that interest rates will remain unusually low for a very long time.”
Most economists, however, are still predicting that the Bank of Canada will raise interest rates rather than lower them in 2012. In a recent Reuters survey of 40 economists last month, the consensus was that an interest rate increase will occur in the third quarter of next year.
If rates are cut, it will mark a sharp turnaround for the Bank of Canada, which only last year raised interest rates. Canada became one of the first advanced economies to raise its benchmark interest rates following the recession when the Bank of Canada implemented a 25 basis point hike in September of last year. The benchmark rate has since remained unchanged at 1%.
What if the eurozone implodes?
By Peter Apps, Political Risk Correspondent
LONDON — Any eurozone failure would send shock waves around the globe, shifting the balance of geopolitical power and perhaps prompting a fundamental reassessment of what the world’s future might look like.
EU sources told Reuters that officials of France and Germany, since the 1950s the driving forces of European integration, had held discussions on a two-speed Europe with a smaller, more tightly integrated euro zone and a looser outer circle.
Estimates of how likely the currency bloc is to break up, how damaging it might be and what might remain afterwards vary wildly. But with European leaders still struggling to find a credible response to the crisis, the prospect of one or more countries leaving — and effectively defaulting on their sovereign debt as they do so — is seen rising by the day.
Suddenly, pundits, policymakers and other observers find themselves questioning one of their most fundamental assumptions — that an increasingly united Europe would be a key player in a newly multipolar world.
“You already have one of the great pillars of globalisation, the United States, entering a period of difficulty and looking inward,” said Thomas Barnett, US-based chief strategist of political risk consultancy Wikistrat — which is being asked by several private clients to urgently model scenarios. “Now one of the other pillars, Europe, looks about to implode.”
That, he said, could leave the continent’s powers — who only a handful of years ago made up much of the G7 group of largest economies — increasingly sidelined as China, India, Brazil and others rose.
At the very least, analysts say, the world may have to get used to a Europe that has lost much of its confidence and has much less appetite for international engagement.
Coming after so many meetings not just of European leaders but also the G20, it would also leave the reputation of existing global governance systems and a generation of political and economic elites in tatters. Some of the damage may already be largely irreversible.
“Even if by some magic the crisis were to be over tomorrow, the other strategic actors in the world are already beginning to revise their views of Europe,” said Thomas Kleine-Brokhoff, a strategy expert at Europe-facing Washington DC think tank the George Marshall Foundation of the United States. “Any consensus that Europe was simply and certainly on the path to integrate further and become a unitary actor is gone.” That raises interesting questions for other areas of the world, where many had often expected regional blocs would gradually in time form EU-like entities and move to closer integration.
“Europe was supposed to be the model for others to follow,” said Nikolas Gvosdev, professor of national security studies at the US Naval War College. “That’s going to be questioned.”
DECLINE OF THE WEST?
For some, any unravelling of the eurozone — whether or not it brings with it a collapse of the wider EU — would be seen as yet another sign of much faster than expected western decline.
“For India, China and many of the other new powers, they don’t see simply a crisis of the eurozone,” said Kleine-Brokhoff at the George Marshall Foundation of the United States. “They see a crisis of the rich world and it makes them even more confident that their time has come.”
But that interpretation, some analysts say, could prove an illusion.
“No one would be laughing — I don’t think there would be any winners at all,” said Michael Denison, a former senior adviser to ex-British Foreign Secretary David Miliband and now research director for consultancy Control Risks. “You’d have a banking and sovereign debt crisis that would hurt everyone.”
Whilst relatively self-sufficient states such as India might be among the least affected, most analysts say other emerging markets could suffer perhaps disproportionately.
Whilst the United States and possibly a handful of other states such as Switzerland might enjoy safe haven status and incoming capital, US-based private intelligence consultancy Stratfor — which puts the prospect of at least a partial Eurozone breakup within the year as high as 90% — believes China could prove the greatest loser.
“You’re going to see … a collapse in capital flows to countries like Vietnam, Brazil, parts of Africa,” said Peter Zeihan, Stratfor vice president for strategy. “It’s also going to be the end of the Chinese economic miracle. The largest single market for China is Europe. That’s going to have a huge knock-on effect in China which could include social revolution.”
NOT QUITE YUGOSLAVIA?
Taken as a sign of what increasingly looks like a rudderless and fragmented world, some states may take matters more into their own hands — as Israel is already suspected to be considering over Iran — rather than multilaterally.
“It is almost certainly going to make European participation in operations such as Libya much less likely,” said Gvosdev at the US Naval War College. “That comes just as Washington was hoping Europe would be able to take more of the strain.”
Wikistrat chief strategist Barnett says much depends on what emerges if the Euro falls. If, as many suspect, a rump Eurozone around Germany remains whilst Mediterranean states go their own way, the whole geopolitical focus of the continent could shift.
The northern element, he suggests, could focus its attention
more to the east, giving priority to what could either become a corporatist or confrontational relationship with Moscow. The southern states, in contrast, might integrate much more closely with North Africa and the rest of the Mediterranean — a region perhaps dominated by a newly assertive Turkey. The euro itself should still be salvageable, he says, but it may just be that the political will is simply not there. “It’s essentially a common-law marriage that never quite made it to the church and now seems to be moving towards a split,” said Barnett. “It shouldn’t be necessary, you would have hoped that it could be avoided, but we are living through an age of political immaturity.”
There is a high likelihood of a rise in street protest and resistance to austerity measures in Europe and probably also elsewhere, many experts say, even if more serious violence should largely be avoided.
“This isn’t the breakup of Yugoslavia,” said Control Risks’ Denison. But others aren’t so sure. Chancellor Angela Merkel warned several weeks ago any eurozone failure might endanger the decades of peace the currency and the EU were supposed to cement.
Some worry the risks have been exacerbated by the extent to which Europe’s political and wider elites refused until the last to consider the euro project might fail.
“It’s very difficult to say any of this without sounding like rather a scaremonger, or someone addicted to worst case analysis,” said Paul Cornish, professor of international politics at the University of Bath.
“We (may) be persistently resistant to the signs of change because we don’t like what we see. Eurozone failure might create deep political instability, possibly involving tension and even conflict. We will find ourselves under-equipped and ill-prepared to deal with whatever does happen.”