Opinion mixed on likelihood of rate cut

To cut or not to cut? That's the question that Bank of Canada governor David Dodge will answer Tuesday, letting Canadians know if they'll be paying less to borrow money, and less on their existing floating rate loans.

The betting among analysts on whether it will or won't is mixed.

Those betting on a quarter-point rate cut suspect the central bank will see a need to stimulate the domestic side of the economy to offset the slump in exports resulting from a combination of the strong Canadian dollar and a weakening U.S. economy.

"As the risks to economic growth increase, the Bank of Canada will likely take out an insurance policy and cut the overnight rate (by a quarter point) on Tuesday, and again on Jan. 22," said Scotia Capital economist Karen Cordes.

Those betting against a rate cut note that the latest reading on the economy Friday was that it was expanding at a 2.9-per-cent annual pace in the third quarter, which is above the central bank's 2.8-per-cent estimate of its non-inflationary speed limit.

"The Bank of Canada will only slightly disappoint markets that are hoping for an ease by leaving rates unchanged," said CIBC World Markets economist Avery Shenfeld, predicting the bank will lower its estimate of the inflation threat, opening the door to a rate cut in January.

Financial markets, meanwhile, will be listening closely the next day when MPs on the Commons finance committee quiz the next governor of the Bank of Canada, hoping to get a handle on the thinking of Mark Carney, now an adviser at the central bank who takes over from Dodge on Feb. 1.

Dodge and senior deputy governor Paul Jenkins follow Carney with an appearance Thursday at the Senate committee on banking, trade and commerce.

While Bay Street is waiting to hear from Carney and Dodge, Main Street is likely more interested in hearing from Statistics Canada, which on Friday issues its latest monthly employment report, which will be used to debate whether the Bank of Canada's decision earlier in the week to cut or not was the right one.

Most experts predict the November jobs report will show a slowdown in employment growth.

"We look for at best a modest increase in Canadian employment in November following a spectacular 114,000 increase in jobs in the two prior months," said BMO Capital Markets economist Douglas Porter, who predicted a gain of 5,000, which is well below the consensus of 15,000 and down from 63,000 in October.

He predicted the unemployment rate to increase to 5.9 per cent from the 33-year low of 5.8 per cent in October.

That's still a tight job market, and BMO Capital Markets is forecasting the report will show average hourly wages were up 4.2 per cent from a year earlier, the highest level on records going back 10 years.

The U.S. Federal Reserve, unlike the Bank of Canada, has the luxury of waiting to see how the U.S. job market is holding up before deciding on Dec. 11 on whether to pull the interest-rate trigger.

The U.S. jobs report Friday is expected to also show a deceleration in employment gains.

"Payrolls growth should be significantly weaker," said CIBC's Shenfeld, noting that recent reports on industrial activity and factory orders were weaker than expected.

CIBC expects U.S. employment rose by 60,000 in November, down from 166,000 in October, and that the jobless rate there edge up a notch to 4.8 per cent.

Meanwhile, there will be a flow of lesser economic reports on both sides of the border, such as new auto sales for November on Monday, which will also provide hints to the health of the two economies.

Also on Monday, the Conference Board of Canada releases the results of its November consumer-confidence survey, which will reveal whether individuals are being spooked by financial market ups and downs.

And two of the big banks still have to report their earnings reports, with Canadian Imperial Bank of Commerce and the Bank of Nova Scotia reporting their results on Thursday.

(prepared by Eric Beauchesne/Vancouver Sun)