International trade tensions unlikely to sway the Bank of Canada rate decision Wednesday – Q1 GDP data to follow

The Bank of Canada is not expected to make any substantive changes in Wednesday’s policy decision. Certainly not to the level of interest rates but also to the guidance – or lack there-of – on the likelihood of any future moves after the April decision dropped any explicit reference to the need for future hikes. US-China trade tensions have intensified since then, and there has been some slowing in US industrial output that could yet spill over to Canada. Governor Poloz has highlighted before, though, that risks around trade run in both directions. The removal of US tariffs on Canadian steel & aluminium products, and Canada’s removal of retaliatory measures, arguably leave international trade developments roughly a wash since the last policy decision.

Policymakers have probably been encouraged by signs of stabilization in housing markets in the spring – aside from Vancouver where regulatory measures aimed at cooling the market have been more pronounced. GDP growth is still likely to be quite soft for a second straight quarter in Q1 (to be released Friday, after the policy decision). But the BoC’s call for a 0.3% increase looks if anything a touch on the low side and much of the softness can still be traced to mandated oil production cuts in Alberta and unusually severe winter weather. Employment growth has remained shockingly strong. The divergence with economic growth numbers is a circle that still needs to be squared but, as Governor Poloz has argued, it is also one more reason to think that the underlying growth backdrop is stronger than recent headline GDP numbers would suggest. Perhaps most importantly, core inflation trends have been locked firmly around the central bank’s 2% inflation target. Comments from Governor Poloz after the last policy meeting suggested there is still at least an implicit bias to push rates higher rather than lower at some point, but there is nothing in the inflation data pushing for a move one way or another at the moment.

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Our own estimate for Q1 GDP growth is a touch stronger than the BoC’s call at 0.7%. Stronger growth in economic indicators for March and April to-date have bolstered our view that bad weather was to blame for a 0.1% drop in GDP in February. We are looking for a 0.2% increase in March on the back of rebounding transportation and manufacturing output as well as the beginnings of a pickup in oil production after declines to start the year in the wake of Alberta’s production curtailments. The composition of Q1 GDP growth should look uninspiring once again with a big build in inventories offsetting another soft quarter for household spending and a pullback in exports. But stronger monthly GDP in March would still leave the odds in favour of a bounce-back in growth to a 2% rate in Q2.


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