- Meeting market expectations, the Bank of Canada left its overnight interest rate unchanged at 1.75% today. The statement that came with the decision had a ‘business as usual’ tone, suggesting that there remains no impetus to move the policy interest rate. The Bank of Canada judges that “the degree of accommodation being provided by the current policy interest rate remain appropriate”
- The Bank sees a lot to like in its updated assessment of economic conditions, noting “accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup”. The statement pointed to recovering oil production, a more stable housing market, and continued strong job growth. The Bank sees signs of a pickup of consumer spending and exports in the second quarter, as well as business investment that has “firmed”.
- Unsurprisingly, the downsides stem from the external environment. The global economy is characterized as moving in line with the Bank’s expectations, but trade conflicts have driven uncertainty higher. Chinese trade restrictions are impacting Canadian exports, although the removal of steel and aluminum tariffs and better prospects for making CUSMA law may serve to counterbalance the negatives.
- In terms of inflation, there is little to report, with CPI inflation expected to remain around the 2% target in coming months.
Key Implications
- No surprise here. Friday’s GDP report is a possible wildcard, but so far it appears that economic growth in the first half of the year is likely to meet the Bank of Canada’s expectations. On its face, this should provide the Bank confidence in its outlook, but two things bear remembering. First, the outlook for the first half of the year sees quarterly growth averaging just 0.8% annualized, hardly a robust performance. Secondly, the Bank’s forecast sees a more robust second half performance, but this is a ‘pure’ forecast that will not be confirmed (or denied) in the data for some time yet.
- On that note, the uncertainty surrounding the second half of the year remains elevated. Even as we’ve received some ‘wins’ in the form of the end of steel and aluminum tariffs, other trade conflicts are maintaining a haze over the economic outlook. Against this backdrop, a neutral stance that maintains optionality in the form of data dependence seems appropriate.
- Overall, today’s short statement appears to have been built with tempering market expectations in mind. Carefully balancing near-term positives with longer-term risks and maintaining data dependency suggests that markets may be getting ahead of themselves in skewing the odds towards a rate cut later this year (implied odds stood at about 30% following the statement, roughly unchanged). It seems that we’ll need to see a deterioration in the economic data to spur easing, which, for the time being, is not in the cards – neither in the Bank’s view, nor ours.
