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Just months ago, the prospect of an additional Bank of Canada rate hike by the end of 2020 was very much on the table.

In recent weeks, however, whispers that the next rate move may in fact be down have been growing louder.

In December, Capital Economics said they expected a rate cut before the end of 2019—a call that turned some heads. But now, heavyweights like JPMorgan Chase & Co. and CIBC are adding their voices to those forecasting an impending rate cut rather than a rate hike.

JPMorgan Chase has reduced its Canadian growth forecast to 1.5% from 2.25% and expects the BoC to deliver a 25-bps cut at its October rate meeting.

Economists at CIBC also expect a 25-bps cut to the overnight target rate, but not until the second quarter of 2020, following expected rate cuts by the U.S. Federal Reserve.

“We’ve long been in the camp that Canadian central bankers were done with rate hikes, but now see it likely that a widening output gap in 2020 will force the bank’s hand to stay true to its inflation target,” wrote Royce Mendes, a senior economist at CIBC, and Ian Pollick, head of North American rates strategy, in a research note.

CIBC isn’t the first to suggest a rate cut will be the BoC’s next move, but they are the first of the Big 6 banks.

The other big banks expect the BoC to maintain its 1.75% target rate through to the end of 2020, except for National Bank, which is still calling for two quarter-point rate hikes in the second half of next year.

A Coming Recession?

gloomy forecastIn its last rate announcement, the BoC reiterated that it believes any economic slowdown will prove temporary.

“…recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased,” read the BoC statement.

Anyone following the recent moves in yields, however, will know that the bond market is taking a different view.

“Bluntly put, the BoC’s outlook comes with a healthy dose of hope, and the bond market’s view comes with a healthy dose of skepticism,” mortgage planner Dave Larock wrote in a recent blog post. “In the current environment, the latter seems a more reliable outlook than the former.”

South of the border, analysts at Morgan Stanley are confident that the recent inversion of the U.S. yield curve, which happened in mid-March for the first time since mid-2007, is an ominous economic signal. “We think this means the U.S. economic slowdown and rising recession risk is happening regardless of the trade outcome,” the strategists wrote last week.

Larock noted that the U.S. yield curve has inverted 10 times since 1960, and in nine of those 10 instances a U.S. recession followed. Although, he notes Canadian yield curve inversions aren’t as reliably predictive.

U.S. Rate Cut Expectations Rising

Falling Interest RatesForthcoming interest rate cuts in the U.S. seem like a foregone conclusion, with markets pricing in up to three 25-bps cuts by the end of 2020.

Federal Reserve Chairman Jerome Powell stated last week that he is open to cutting interest rates if necessary, depending on the fallout from deepening trade disputes.

And today, the latest monthly non-farm payroll numbers disappointed again, marking the weakest four-month period of U.S. jobs data since 2012, according to analysts at ForexLive.

Markets there are pricing in an 80% chance of a rate cut by the FOMC at its July meeting. Looking out to September, the chance of a 25-bps cut rises to 93% and 50% for a 50-bps cut.

“…if the Fed cuts its policy rate, bond-market investors may expect that the BoC will have no choice but to follow suit,” Larock noted, adding “failure to do so would buoy the already stubbornly lofty Loonie and further undermine the current momentum in our export sector, which is underpinning the bank’s optimism.”

The Bank of Canada’s next rate decision is on July 10.

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