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Despite leaving its key lending rate unchanged at 1.75% today, the Bank of Canada sounded more cautious about global headwinds than in the past. That has led to speculation of an impending rate cut early in 2020, or potentially as early as the Bank’s next meeting on December 4.

“Governing Council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist,” the BoC statement noted. “In considering the appropriate path for monetary policy, the Bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment. In this context, it will pay close attention to the sources of resilience in the Canadian economynotably consumer spending and housing activityas well as to fiscal policy developments.”

Against a more delicate global economic background, the Bank projects Canada’s GDP growth at 1.9% in 2019, and revised down its longer term forecasts to 1.7% in 2020 and 1.8% in 2021. It also expects inflation to track close to 2% over the projection horizon.

Canada’s 5-year bond yield (which leads fixed mortgage rates) plummeted more than 16 bps over the day to 1.46%, as investors priced in the greater chance of a forthcoming rate cut.

Timing of a BoC Rate Cut

Bank of Canada financial buildingOdds rose to about a third that the Bank’s first rate cut in over a year could come as early as next month.

“While an interest rate cut at the next meeting in December is clearly not a foregone conclusion, all this suggests that the Bank is heading in that direction and the chance of an interest rate cut in December will rise if the data deteriorate as we expect,” noted Stephen Brown, chief economist at Capital Economics.

Most economists, however, think a cut early in the new year is still more likely at this point.

“Rate cuts are most definitely on the table,” wrote Brian DePratto, Senior Economist TD. “…the path to a rate cut is clear, and they’ve shared the map with markets, but they have not yet chosen to walk down it. Barring a marked improvement in the global backdrop, we expect Poloz to put on his walking shoes in early 2020.”

Douglas Porter, BMO’s Chief Economist, added: “The Bank of Canada appears to have a bias to cut rates, and we may be just one more serious global trade accident away from them acting on that bias.”

U.S. Fed Delivers Third Rate Cut This Year

The Federal Reserve Building In Washington DC, USAMeanwhile south of the border, the U.S. Fed announced its third quarter-point rate cut this year, bringing rates to a range of 1.50–1.75%. This is the first time since 2016 that the lower bound of that range has fallen below the BoC’s target rate.

“Domestically, everything looks super good,” Queen’s University economics professor told the Financial Post. “The elephant in the room is the divergence of the Bank of Canada and the rest of the world.”

Indeed, the BoC is now left with the highest policy interest rate among the world’s largest economies.

However, with the Fed changing key wording in today’s statement, it has signalled a likely pause in any further easing, unless conditions deteriorate “materially.”

“The committee pared back its forward guidance, no longer saying it will ‘act as appropriate to sustain the expansion,'” RBC senior economist Josh Nye wrote in a research note. “Uncertainties about the outlook remain, but at this stage it looks like the Fed has delivered its mid-cycle insurance cuts and will move to the sidelines.”

This should afford the Bank of Canada some time to further weigh conditions and eventually start to narrow the rate gap.

OIS markets are currently pricing in a 26.5% chance of a cut at the December 4 BoC meeting, and a 46% chance by January.

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