Dovish Bank of Canada Holds Rates for Now

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Ottawa, October 22nd, 2019—The Conference Board of Canada’s Principal Economist Alicia Macdonald offers the following insights on today's Bank of Canada announcement:

The Bank of Canada held its policy rate steady this morning. The overall tone of the statement is best characterized as dovish with concerns about the Canadian economy’s ability to withstand the global slowdown mounting. Even with the Bank concerned about high levels of household debt, this morning’s statement reinforces our forecast that the Bank will cut rates early next year.

Insights

  • The Bank of Canada held its overnight rate steady at 1.75 per cent this morning, a move that was widely expected.
  • This morning’s rate announcement was accompanied by an updated economic projection in the October Monetary Policy Report. While the Bank has upgraded its forecast for the year thanks to the strong second quarter performance, it expects a period of below potential growth over the second half of the year.
  • According to the Bank, the main factors weighing on the Canadian outlook are slowing global growth and falling commodity prices. These are having a large enough impact that the Bank expects investment and exports to contract before returning to growth in 2020 and 2021.
  • Even with trade and investment remaining weak, domestic demand has held up. Job gains have been robust, wages are accelerating, and housing markets are recovering. While this will help support economic growth, the reliance on consumer demand to drive growth has the potential to stoke financial vulnerabilities given already high household debt levels.
  • The Bank downgraded its outlook for the next two years with growth now expected to come in at 1.7 per cent next year and 1.8 per cent in 2021. In July it was expecting growth of 1.9 and 2.0 per cent, respectively. Despite that downgrade, the Bank still anticipates that the output gap will slowly shrink, and that inflation will remain anchored around its target.
  • Overall, the Bank’s most recent forecast is inline with our September outlook that calls for a notable slowdown in growth over the second half of the year. We maintain our call that the slowdown will be significant enough to warrant a policy response, with the Bank expected to cut rates early next year.

Alicia Macdonald

Principal Economist

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