The Conference Board of Canada’s Senior Economist Robyn Gibbard offers the following insights on today’s Bank of Canada announcement:
In its rate announcement this morning, the Bank of Canada held interest rates steady at 1.75 per cent, as expected. This seems like the most prudent possible course. With inflation running at target, global economic risks beginning to ease, and with Canadian consumers carrying hefty debt loads, the Bank has little reason to change rates now. The Bank is also in the enviable position of having ample room to cut rates in the event of a downturn, something that cannot be said of central banks in Europe or Japan. Barring a recession or unexpected acceleration in inflation, we expect rates will stay where they are until 2022.
- The Bank of Canada held its overnight rate steady at 1.75 per cent this morning, matching our expectations.
- In its monetary policy report published this morning, the Bank said that the global economy appears to be stabilizing after a period of slowing growth. It noted that trade tensions have been easing, with the first phase of an agreement between the U.S. and China as well as the pending ratification of Canada-United States-Mexico Agreement. This new optimism was first evident in the Bank of Canada’s December rate statement. Nevertheless, the primary downside risk cited by the Bank continues to be the effect of global trade tensions.
- According to the Bank of Canada’s latest economic projection, growth in the fourth quarter of 2019 slowed to just 0.3 per cent. Businesses drew down inventories and consumers chose to save, which in turn reduced growth in consumer spending and business investment. This is a dismal performance, and in his press conference Governor Poloz noted that in some ways these data represent downside risks being realized.
- However, in justifying the decision to leave rates unchanged, he also noted that the Bank expects economic activity to pick up again in 2020 as global growth improves and population and income gains remain strong. This matches our own latest forecast. Governor Poloz also noted that the benefit of cutting rates in response to the poor news would be outweighed by the risk of additional household borrowing that could follow from lower rates.
- With the economy operating near its capacity, inflation has remained very close to the Bank’s 2 per cent target. The latest CPI inflation release was also this morning, and it showed year-on-year prices rising by 2.2 per cent in December. The average of the Bank’s measures of core inflation held steady at 2.1 per cent. With almost all peer countries seeing persistently weak price growth, these healthy inflationary pressures make Canada an outlier.
- The Bank of Canada’s policy rate has become an outlier. The Bank has held rates steady for more than a year even as the central banks in most other G7 nation cut rates or engaged in quantitative easing. Canada is now tied for the highest policy rate among G7 countries. In the event of a downturn, this will give the Bank of Canada considerably more leeway than its peers to absorb shocks by lowering rates.
- The next scheduled rate decision is March 4, 2020. If the economic outlook unfolds as we expect, we predict that the Bank will hold rates steady until 2022.
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