- The overnight rate was held steady at 1.75%
- Global growth forecasts revised lower
- 2020 and 2021 Canadian GDP projections marked down
The Bank of Canada held rates steady but hinted at an easing bias for the first time this year. With trade conflicts and uncertainty weighing on global trade flows and business investment, the BoC marked down its global GDP forecast by 0.1 ppt this year and next (average growth of 3% is slightly below the bank’s estimate of global potential GDP). Governing Council said a soft global outlook will increasingly test the Canadian economy’s resilience heading into 2020. The BoC is asking the same question we are: will a slowdown in industrial production and business investment eventually spill over into other sectors? At this point there’s is little evidence of that dynamic in Canada—as the BoC noted, the services sector has been robust and job growth remains strong. Rising wages and lower interest rates are providing support to the consumer and housing sectors. But falling commodity prices, a strengthening Canadian dollar, and ongoing softness in the energy sector are clearly headwinds.
Today’s dovish policy statement boosted market odds of a rate cut in the first half of 2020, and leaves us more comfortable with our call for a move early next year. The BoC’s forecast (and our own) shows sub-trend growth around the turn of the year—with the economy already carrying about 1/2 ppt of slack in the BoC’s view, the central bank likely has a limited appetite for disappointment. That said, the potential for a post-election fiscal boost might be cause for patience. In addition to resilience of the Canadian economy, the BoC said it will be paying close attention to fiscal policy developments.
