- As was widely expected, the Bank of Canada left its policy interest rate at 1.75% this morning. The statement that came with the decision painted a downbeat picture. Front and center were the ongoing trade conflicts, which are dragging global growth lower despite monetary easing in other economies. The domestic picture was not much better, with the Bank expecting further contractions in investment and exports. Perhaps the most notable statement was that “… the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist”. The loonie dropped about 0.5% on the back of the decision.
- The latest Monetary Policy Report (MPR) came with today’s decision. The Bank now forecasts growth for this year at 1.5%, an upgrade from 1.3% in July, and largely owing to second quarter strength. This masks that they have downgraded the third and fourth quarters to a below-trend 1.3% pace. The outlook for 2020 and 2021 were both marked down 0.2 percentage points, to 1.7% and 1.8% respectively.
- The domestic forecast changes come against a weakened global backdrop. The Bank now forecasts global growth of just 2.9% this year (was 3.0%), picking up modestly to 3.1% next year (was 3.2%). This now mirrors our forecast.
- Inflation has held close to the 2% target of late, but is expected to soften next year as earlier energy price movements fade out of the data. Unsurprisingly, the Bank expects inflation to settle back around the 2% mark around early 2021.
- It wouldn’t be an MPR without a run-down of what the Bank sees as the major risks. Top of the heap is the possibility that global financial conditions tighten sharply on rising risk premiums, sapping growth. Next on the list is the possibility of stronger Canadian consumer spending, as the forecast incorporates what the Bank calls “cautious” behaviour. The remainder of the list was largely negatives, including the risk of weaker emerging-market growth and global disinflation.
Key Implications
- Rate cuts are most definitely on the table. After election-induced radio silence, the Bank of Canada came back to life with a notably cautious take on current events. Governor Poloz may change things up in the press conference, but when your statement includes a view that further contractions in investment and exports are likely, and that the economy will be “increasingly tested”, it would seem to suggest that the possibility of monetary easing is top of mind.
- To be fair, the MPR itself was not quite as negative. Yes, the growth forecast has been marked down again, but to what we would consider a reasonable baseline, and the Bank continues to see growth picking up to around its potential growth rate in the coming years. The aforementioned contractions in investment and exports are not forecast to persist, and the still strong labour market is expected to support household spending. The outlook for housing was also marked up notably.
- Where does this leave us? The risk going into the decision was that the Bank would close the door to rate cuts. This clearly has not happened. The Bank has maintained its optionality – the path to a rate cut is clear, and they’ve shared the map with markets, but they have not yet chosen to walk down it. Barring a marked improvement in the global backdrop, we expect Poloz to put on his walking shoes in early 2020
