OTTAWA - Is the next move for Mark Carney to cut interest rates?
The question would have seemed unthinkable a few weeks ago given that the Bank of Canada governor's last pronouncement on the subject was to issue a wink and a nudge about coming hikes.
The signal-sending language — "some modest withdrawal of the present considerable monetary policy surplus may be appropriate" — contained in the April interest-setting statement sent markets into speculation hyper-drive that rates could be heading north as early as the summer.
Tuesday's upcoming announcement was never in play and isn't in play now. Economists are as unanimous as can be that Carney will keep the policy rate moored at one per cent a little while longer.
But now the speculation has turned full circle about the nature of the next move, whenever it comes.
"The state of the world is increasingly making clear that a rate hike at this point would be premature," said Avery Shenfeld, chief economist with CIBC World Markets.
"In fact, the OIS futures market today (Friday) started pricing in a rate cut for later this year."
Of course, the speculation on when Carney was going to start tightening policy began cooling long before Friday.
The revived crisis in Greece, which increasingly looks unsolvable short of insolvency, the growing banking crisis in Spain, unresolved debt problems in Italy and Portugal, had already lengthened the odds on Carney moving this fall, and likely made him regret his April assessment that Europe's crisis had moved from "the acute to the chronic."
But if there was any doubt remaining, Friday's onslaught of weak and very weak data from Canada, the United States, China and Brazil, following a bad output number out of India Thursday, removed it.
Friday's report on Canadian gross domestic product did not show the economy tanking in the first quarter, but at 1.9 per cent growth it was well below the central bank's April call for a 2.5 per cent advance. It now looks unlikely the bank's equally optimistic 2.5 per cent for the second quarter will come to fruition either.
And given the Canadian export sector's reliance on flush U.S. consumers, the miserly gain of 69,000 jobs reported south of the border for May was even a worse signal that the next few months will yield at best craw-speed momentum. China and Brazil also reported soft economic data.
The two disappointing North American reports all but wipe out the good memories of Canada's record-breaking 140,000 job gains in March and April. Analysts expect May will pour cold water on the employment front when the number is released next Friday.
TD Bank economist Diana Petramala isn't giving up altogether on a rate hike, however, although she is hedging her bet.
In a note to clients, she noted that if growth maintains a two-per-cent pace throughout 2012, "the argument for some withdrawal of monetary stimulus by the fall still holds. However, a continued deterioration in global financial markets could keep the central bank on the sidelines."
Even with the caveat, that is a minority view.
Capital Economics' David Madani thinks 2014 is more likely and Derek Holt, vice president of economics with Scotiabank, is coming around to the view.
Carney's previous signal on interests rates was predicated on the assumption that Canada's growth rate would smoothly expand at about 2.5 per cent throughout 2012, enabling the economy to return to full capacity in the first half of 2013.
At sub-two per cent, however, the output gap is actually widening slightly rather than closing, so the argument for tightening rates evaporates, especially since inflation remains tame.
As well, hiking rates raises the cost of borrowing for consumers and businesses, dampening economic activity, while pushing up the Canadian dollar, which depresses exports, analysts note.
The only positive would be to help slow down the housing market, which all indicators suggest is already cooling with the rare exception of Toronto condo sector.
"I buy that in a perfect world, the bank would love to raise interest rates," said Holt.
"But the growth profile continues to underperform the speed limit of the economy so you still get building economic slack that the Bank of Canada did not anticipate," explained Holt. "So more slack, more geo-political concerns, that gives the bank full course to leave rates alone for a long, long time yet."
Holt said the bank's Carney will likely need to do a bit of a climb-down Tuesday. But at the next setting in July, "the April monetary policy review will have to be completely rewritten " to reflect to gloomier outlook.
Carney did get some sympathy from Jens Larsen, the Royal Bank's chief European economist, during his visit to Ottawa last week.
Larsen's job is to track developments in Europe's sovereign debt saga and said he too mistakenly judged the temperate easing on the crisis atmosphere. But then stuff happened, he said, and now he too is rueing his previous optimism.