Bank of Canada Holds Rates, More Neutral Than Dovish
The Bank of Canada left its key interest rate unchanged today, as expected. But its accompanying statement had a more neutral than dovish tone than some observers had expected, calling into question the certainty of an October rate cut.
The bank said the country’s economy is operating “close to potential” while inflation is on target.
“In this context, the current degree of monetary policy stimulus remains appropriate,” read this morning’s statement.
However, given growing concerns over the global outlook and rising trade tensions, the BoC’s first rate cut in more than four years is still increasingly likely. The only thing that isn’t so certain is the timing of such a rate move.
“…escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies,” the BoC added. “…As the Bank works to update its projection in light of incoming data, Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation.”
What Investors are Saying…
Markets had priced in roughly a one-in-10 chance of a rate cut this month, with a 60% chance the BoC will reduce rates at its next meeting on October 30, according to Westpac.
OIS swap markets still believe a rate cut is likely before the end of the year, pricing in a 97% chance of a cut by the bank’s December meeting.
What Economists Are Saying…
Some observers had expected Bank of Canada Governor Stephen Poloz to give a clearer signal that an easing of current monetary policy is in the cards.
“Since its July meeting, conversation has shifted from ‘if’ to ‘when’ the BoC will join its many global peers in lowering interest rates,” wrote RBC economist Josh Nye. “But that evolution wasn’t obvious in today’s policy statement, which was more neutral than expected and lent support to the Canadian dollar.”
He noted the bank gave no direction on future policy moves, but instead reiterated that “the current degree of accommodation remains appropriate.”
CIBC’s chief economist Avery Shenfeld said that while the BoC will eventually be forced to cut rates, the tone of today’s statement left the door open to the timing of any cut.
“The Bank of Canada left rates where they were, and drafted a statement designed to give them some time to think about what to do next, rather than dropping a clear hint of an October cut,” he wrote.
Where the BoC Goes From Here
There’s a consensus that Canada’s overnight target rate, which has remained at 1.75% since last October, is bound to fall. What’s less clear is the timing of any cut,or cuts.
Here’s what some economists are saying…
Josh Nye, Senior Economist, RBC: “Our forecast still assumes the BoC will hold off on lowering its overnight rate until January 2020, though risk of an earlier move has increased.”
Krishen Rangasamy & Paul-André Pinsonnault, NBC: “Developments on the trade front (i.e. U.S.-China negotiations) will be crucial in determining what the central bank does next given the impact they will have of global and hence Canadian growth. If, as we expect, there are positive developments on the trade front, the BoC needs not alter its current policy stance. Else, the central bank may be forced to follow the Fed in easing policy significantly.”
Douglas Porter, Chief Economist, BMO: “The rate has been pegged at this level since last October, but the tone of the statement left the Bank with the option to trim this October…Clearly, much will ultimately depend heavily on how the US/China trade war plays out; but, given that we are not optimistic on that front,we lean to a rate cut in late October.”