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 has taken note of the recent weak economic data, stating that the economic outlook continues to warrant a below neutral interest rate. Accordingly, the Bank kept rates steady this morning and with household spending slowing more sharply than anticipated and business investment yet to rebound, an interest rate increase is unlikely this year.”
—Alicia Macdonald, Principal Economist, The Conference Board of Canada
As was widely expected, the Bank of Canada left its overnight rate steady at 1.75 per cent this morning.
The Canadian economy barely managed to eke out growth in the final quarter of 2018 and when you isolate domestic spending (final domestic demand), real growth fell for the second consecutive quarter—a clear sign that households will not support strong economic growth on their own going forward.
What the Bank has been counting on is a pickup in business investment and exports to help offset a slowdown in consumer spending and residential investment. Unfortunately, that has yet to materialize and with global growth now slowing and trade uncertainties remaining elevated, there is risk that the rebound in that sector will not be as strong as expected.
In its press statement, the Bank noted it now expects economic growth to be even weaker in the first half of 2019 than it had predicted in January—a forecast that called for growth of just 0.8 per cent in the first quarter.
The Bank is expecting inflation to come in just below 2.0 per cent for most of the year, due not just to the temporary impacts of weaker gasoline prices, but also because of a larger output gap.
In January’s statement, the Bank had noted that interest rates would need to move higher over time to a neutral range but in today’s statement the language shifted to say that the economic outlook warrants a policy rate below neutral and that there is more uncertainty about the timing of future rate hikes.
Given the high level of household indebtedness, we are in unchartered territory when assessing the impact of rising interest rates on spending. Indeed, one of the biggest surprises in the recent GDP data was just how sharp the slowdown was in household consumption and housing investment. With higher interest rates and new housing regulations apparently having a larger impact than expected and trade risks tilting to the downside, it seems unlikely that we will see any interest rate increases from the Bank of Canada this year.