- As was widely expected, the Bank of Canada held its overnight interest rate at 1.75% this morning. The accompanying statement was a bit less dovish than expected, as the Bank appears to have maintained a tilt towards data dependency.
- The Bank’s latest assessment of economic conditions was relatively balanced. On the positive side, it noted stronger than expected second quarter GDP growth and housing activity, as well as rising wages. Balancing this out is the weak business investment story, both here and abroad, increased concerns about global growth, soft consumption figures, and a view that economic activity will slow in the second half of 2019.
- The key element as the Bank updates its growth forecasts ahead of their next decision will be global developments – set to receive ‘particular attention’.
- On the inflation front, the Bank sees headline inflation as artificially boosted by temporary factors (air travel, mobile phones, etc.), and noted that all core inflation measures remain around the two percent target.
Key Implications
- Markets, and ourselves, were looking for more of a dovish signal today in a nod to escalating trade tensions and weakening global picture. As a result, the loonie strengthened in a knee-jerk reaction and the implied odds of an October cut eased slightly in the wake of this morning’s decision. But, even if the Bank of Canada has not telegraphed an October rate cut, we believe the backdrop makes it the most likely outcome.
- Reading between the lines, nearly every positive note in today’s statement was balanced by a qualifier. For instance, wages and labour income are up, ‘yet consumption spending was unexpectedly soft in the quarter’. The Bank also seems to be getting ahead of potential criticisms of easing, noting that despite strong housing activity of late, ‘mortgage underwriting rules should help contain the buildup of vulnerabilities’.
- We have to be careful in putting too much weight on particular language and word choices, but it is notable that the Bank added the qualifier ‘current’ to its statement that monetary policy stimulus remains appropriate – this qualifier was last seen in 2015, ahead of the second ‘insurance’ interest rate cut.
- The most clear signal is the statement that the next move will hinge on global developments. Most signals we’ve been receiving have been unquestionably negative, and no end to the trade disputes is in sight. Fade the market reaction this morning – barring a significant surprise, we still expect an October rate cut.
