As the Bank of Canada announced yesterday that it will maintain its overnight rate, our Chief Strategist John Johnston gives an overview of key implications that are important for investors.
- The Bank of Canada (BoC) left the overnight rate steady at 1.75%, but is leaning slightly more toward lower rates than higher rates.
- It forecasts improving global, U.S. and Canadian economies with core (or underlying) inflation around 2%, just as we do.
- I believe that we will have to see a new and unexpected deterioration in economic conditions to prompt officials to cut rates.
Key Implications & Discussion
- BoC left overnight rate steady at 1.75%, as widely expected.
- The policy bias has tilted slightly toward lower rates ahead.
- Global and U.S. economies are evolving as expected in the last report in October. No major forecast changes. The global economy is stabilizing and will re-accelerate gradually.
- Recent trade developments are positive, but the risks of new trade actions persist. The BoC estimates that half of the estimated impact of trade actions implemented to date occurred by the end of 2019. Trade issues will be a headwind for global trade volumes and capex, and hence the overall economy this year. Nonetheless, the BoC judges that the worst-case downside risk from trade is now less likely.
- Canada’s economic picture has been mixed since October. While growth forecasts are only slightly revised (up to 1.6% from 1.5% in 2019, down to 1.6% from 1.7% in 2020, and up to 2.0% from 1.8% in 2021), the BoC expects Q4/2019 and Q1/2020 to be weaker than it did previously. This may be due to temporary factors (bad weather, strikes, inventory adjustments), but might also be due to the bigger impact of a global slowdown.
- Cautious view of consumer spending, with elevated indebtedness and higher savings rate (higher, but still very low in the 3% range) a headwind, but a growing population and strong labour market a tailwind.
- In its assessment of the risks, the BoC notes reduced trade risk but increased geopolitical risk, which it does not expect to see realized. Outside this, it sees the risks to its projected path as “roughly balanced”.
- In spite of this, the wording in the BoC press release states that Bank officials will be watching to see if weakness through late 2019 and early 2020 will be more persistent than expected, which suggests a slight tilt toward an easing bias.
- If the economy evolves the way the Bank and we think it will, the BoC will not have to cut rates.
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