Matching expectations, the Bank of Canada held its overnight interest rate unchanged at 1.75% this morning. The tone of accompanying communication tilted dovish, perhaps more than markets anticipated given the immediate further decline in yields and the dollar. Compared with the last statement, the Bank is now focused on “the appropriate degree of monetary policy accommodation as new data arrive”, with reference to potential future rate increases gone.
Today’s decision came with a new Monetary Policy Report (MPR). The Bank of Canada again downgraded their growth forecast, looking for 1.2% growth this year (was: 1.7%). Downgrades to growth were fairly widespread, offset by a build-up of inventories. Much of the downgrade appears to be driven by their 2019Q1 and Q2 expectations of 0.3% and 1.3% respectively, reflecting curtailment impacts and volatile data to date. The Bank’s 2020 forecast was unchanged, at 2.1%, and the newly public outlook for 2021 sees growth at 2.0%.
The April MPR also brings revisions to the Bank’s core assumptions. Potential (long-term trend) growth was left unchanged at 1.9%, although the nearer-term was marked down a tick. Productivity is expected to contribute less to growth, with labour picking up the slack.
A re-assessed view of the ‘neutral’ policy rate came with a downgrade – the Bank now sees the range consistent with the economy operating at its long-run potential as 2.25% to 3.25%, a reduction of 0.25p.p. from its previous view. This suggests that the current stance of monetary policy is a bit tighter than previously thought.
On the outlook for inflation, the Bank sees little near-term pressure as a negative output gap plays off against the positive lifts from the softer loonie and carbon levies.
The MPR captured their views on the balance of risks. On the negative side are global trade tensions, a tightening of global financial conditions, weaker growth in advanced economies, and more Canadian housing weakness. Conversely, the Bank sees the possibility of upside growth surprises from a positive resolution of trade disputes, stronger U.S. growth, and the possibility of stronger Canadian household spending and debt growth (which would in turn increase longer-term downside risks).
Patience is a virtue. The core message today is one of caution, with the Bank of Canada removing any reference to future rate increases in light of soft near-term growth and still elevated risks.
The drivers of this increased caution all make sense. The Bank’s near-term growth outlook sees sub-trend growth for the first half of the year, a reasonable assumption in light of the fact that the data has serially disappointed for three straight quarters. Similarly, the Bank’s downgrade of where it sees the policy rate eventually landing speaks to caution – stimulus can be crudely measured by the difference between the current rate and this range, meaning that the current level is a bit less supportive of growth than previously thought. The Bank of Canada also addressed the limitations around estimations of the neutral rate in their MPR today, acknowledging the high uncertainty around this unobserved variable as we discussed in a recent note.
With all these downgrades, is Governor Poloz signaling a rate cut? No, or at least, not yet. While the risks may skew in that direction, the Bank’s view remains that the current growth soft patch is temporary, with 2020 growth left unchanged at an above-trend 2.1%, and with better details (upgrades to consumption and housing). The bar for easing is probably a bit higher given fairly soft near-term growth expectations, so expect to sit at the current 1.75% overnight rate for some time to come.