• The Bank of  Canada held its policy interest rate unchanged at 1.75% this morning, meeting market expectations. The accompanying communique indicated that the Bank still sees the current setting of monetary policy as appropriate, but noted that the outlook is “clouded by persistent trade tensions”. The loonie dropped about 0.4% immediately following the decision, although this shouldn’t be considered new news on how the BoC views trade risk developments.
  • Also released was the latest Monetary Policy Report (MPR). In the near-term, 2019 growth has been marked up to 1.3% (from 1.2%) on the back of expected second quarter strength. The outlook for 2020 offset this with a markdown of 0.2 percentage points, to 1.9%, largely due to a weaker export forecast. The 2021 outlook was left largely unchanged.
  • The global backdrop has also weakened in the Bank’s view. Global growth for this year and next has been marked down 0.2p.p. and 0.1p.p. respectively.
  • When it comes to inflation, the Bank’s latest view is that the recent strength will not persist. Inflation is forecast to dip below-target over the third quarter as gas price movements and other temporary factors work their way through the data. As usual, inflation is seen settling back to a sustainable 2% trend in roughly a year’s time.
  • As usual, the MPR also included a round-up of what the Bank considers major risks. First on the list is the potential lift from a stronger U.S. economy. The remainder of the list was comprised of downside risks: tighter global financial conditions, increased consumption and household debt here in Canada, weaker Chinese growth, and more pronounced housing weakness in Canada.

Key Implications

  • The Bank of Canada walked the line with this communication, discussing domestic rebound dynamics that include a view of some one-off factors, while also emphasizing the growing risks to the outlook. Depending on what Governor Poloz communicates at the press conference, the first brush of the statement leaves the impression of a central bank that is ‘going it alone’ in maintaining a balanced view of its policy setting as other major central banks prepare markets for easing.
  • Given the goal, it seems like mission accomplished. Markets sent the loonie back where it started the day, and implied odds of Bank of Canada easing by year-end sit at about one-in-three. This would seem to match a Bank with a still broadly supportive outlook (even after the 2020 downgrade) but facing significant external risks that may require a response should they worsen.
  • Today’s statement supports our view of a Bank of Canada that will stand pat as the domestic economy settles back to a roughly trend pace of growth. They would likely need to see more of the downside risks materialize in hard data to alter that position, with trade tensions topping the list of being a global catalyst.


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