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Election likely to keep interest rates super-low

OTTAWA — The potential federal election is good news in one sense — it likely ensures Canadians will enjoy super-low interest rates until at least the summer and possibly the fall.

OTTAWA — The potential federal election is good news in one sense — it likely ensures Canadians will enjoy super-low interest rates until at least the summer and possibly the fall.

Many economists believe Bank of Canada governor Mark Carney was unlikely to move on interest rates at the next announcement date in April anyway, but say a federal campaign likely settles the question.

And some think Carney will want to wait until the fiscal direction of the next government is known — particularly if there is a change — before moving.

“There is nothing written in stone,” says Douglas Porter, deputy chief economist at BMO Capital Markets, “but my view is that the bank would rather lay low and not become an election issue.”

In the latest survey of economists taken last week, about half saw the bank starting to a new tightening cycle on May 31.

But with the government set to fall in a non-confidence vote on Friday, that consensus may change.

The Canadian Imperial Bank of Commerce announced Wednesday it was moving back its prediction on when Carney will begin tightening monetary policy to July.

CIBC chief economist Avery Shenfeld says the election is one reason he believes the bank will hold off until July. The others are the strong dollar — which would rise along with interest rates — still soft core inflation and the relatively high 7.8 per cent unemployment rate.

“Even a July rate hike is only 50 per cent priced in, so our view would still be consistent with some upward pressure on Canadian bond yields from here to the summer,” he added.

Scotiabank thinks the next rate hike won’t happen until October, and the election is one of the factors.

Scotiabank economist Derek Holt notes that over the past 20 years, since moving to the current inflation-targeting mandate, the central bank has largely avoided switching to a tightening cycle around an election. The only time it did so was in 1997, three weeks after the June 2 vote.

“There has actually been no election in at least the past two decades in which the (Bank) began a tightening campaign before the election itself,” Holt added.

The bank has continued an already established tightening trend during an election before, in December 2005. And in October 2008, Carney cut rates by 50 basis points in co-ordination with other central bankers as the global economy was collapsing.

Part of the reason for not wanting to change course in election periods is that the Bank of Canada scrupulously guards its reputation as an impartial, independent institution.

A rate shift could become an issue in a political campaign, because not only is it a pronouncement on the economy, but also directly impacts consumers and businesses.

But the more important reason, says Holt, is that the central bank doesn’t want to start tightening, which could slow the economy, until it knows what the next government will do.

“When you are uncertain about the risks facing fiscal policy and the outcome of an election, the prudent thing is to keep your powder dry and then decide what you are going to do,” he explained.

The bank will almost certainly stay on hold until the results of this spring’s expected election are in, but may also wait until the next budget, says Holt. That’s because he says the bank will see no compelling reason to act precipitously, given the lukewarm state of the economy.

Porter says the central bank may also pull its punches when it releases its next quarterly economic outlook on April 13, a time when the campaign is expected to be in full swing.

“If they had any intention to raise rates in May, normally they would have sent a signal in the monetary policy review in April,” he said. “But if that’s in the middle of a campaign, they might mask the language.”