Comments from US Fed Chair Powell this week reinforced expectations for a rate cut at the end of July, and we think a follow-up move is likely in September. “Muted” inflation trends give the Fed flexibility to provide a bit more accommodation to offset global growth concerns and a softening US industrial sector (both linked to rising trade tensions). The Bank of England and European Central Bank also look poised to cut rates before the end of 2019. The Bank of Canada remained something of an outlier this week, maintaining a neutral bias in its policy statement on Wednesday. But the central bank put greater emphasis on trade tensions and slowing global growth, raising the odds that its next move will be to lower rates.

How long can the Bank of Canada hold steady while other central banks ease? Much will depend on how the domestic economy holds up to rising external risks. Next week’s economic data should reinforce that Canada’s economy is picking up after a winter slowdown. A big jump in non-energy exports—including a rebound in auto exports—means manufacturing sales probably increased at a solid pace in May. Household spending growth remains modest compared with recent years, but labour markets are solid and recent declines in global interest rates have lowered borrowing costs for Canadian households. We look for retail sales to post a fourth consecutive monthly increase in May. The US consumer looks even healthier, with an expected tick higher in June retail sales likely capping off a nice rebound in household spending in Q2.

The BoC has a bit of leeway to hold rates steady while the Fed eases—Canada’s policy rate is already more accommodative than in the US. And inflation has been running much closer to 2% in Canada. We think that remained the case in June, though headline CPI inflation likely fell back to 2% (due to lower energy prices) and the BoC’s core measures might tick back down to 2.0% from 2.1% on average in May. All told, we don’t think next week’s data will build a case for the BoC to follow its global counterparts in the near-term. However, given Governing Council’s more concerned tone this week, we have penciled in a 25 basis point rate cut early next year. But it will take softer data at home and abroad to justify that move.

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