Will he or won't he?

The Bank of Canada's next rate-setting decision day is Wednesday, and market watchers are resiling en masse from their earlier forecasts that Governor Stephen Poloz would announce another rate cut.  These are, of course, the same market watchers who were stunned when Poloz cut rates back in January.

The revision in the market consensus for this week's meeting is mainly based on comments Poloz made last week, to the effect that the Bank would take the time to assess the effectiveness of the January cut. A stand-pat outcome is also suggested by the latest GDP data, released today, which appear to show that the economy held up rather better than expected in the final quarter of 2014.  GDP rose 0.3% in December , giving an annualized rate of 2.4% for the quarter -- much closer, it may be noted, to Gov Poloz's most recent estimate of 2.5% than to the market consensus of 2.0%.

Given the collapse in oil prices, one of the biggest surprises in today's data is the strength shown by the oil and gas sector, though that strength was concentrated in the early part of the quarter, and there were greater signs of weakness by year end. Some media reports are suggesting that the oil patch -- and particularly the oil sands -- can live perfectly well with oil prices in the $50/bbl range.  Even so, it seems inevitable that exploration activity, though probably not production, will be reined in during the first half of this year.

Which sector stands to take up the slack if the energy sector slows? Despite hopes that the weakness in the exchange rate might provide a boost, it seems unlikely to be manufacturing. The RBC purchasing managers index (PMI) slipped to its lowest-ever level in February,  signalling a modest contraction in the manufacturing sector. As I have endeavored to point out many times before in this blog,  the collapse of manufacturing in southern Ontario and else where in the past decade is not simply a cyclical thing. In the words of Professor Bruce Springsteen*, "these jobs are going, boys, and they ain't coming back".

Truth to tell, rate cuts can't do anything for the oil patch, and there's not much they can do for the manufacturing sector either, at least in the near term.  That doesn't mean Gov Poloz won't pull the trigger again:   the consensus, for now, seems to have shifted to a move in April, though it's not clear how much more the Bank of Canada will know by then. It does mean, however, that the health of the economy will come to depend more and more on the housing sector -- which itself depends on a prodigious level of household indebtedness.

*"My Hometown", from the album Born in the USA