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The overnight policy rate was unchanged at 1.75% as widely
expected on 4 September. The bank rate and deposit rate were
unchanged at 2% and 1.5%, respectively.
The Bank of Canada's estimate for second-quarter growth in the
July Monetary Policy Report was weaker than the 3.7%
quarter-on-quarter annualized rate, but growth in the second half
of 2019 is expected to slow in the last half of 2019.
The Bank of Canada was forecast to keep interest rates
unchanged through 2020. However, the worsening of global trade and
growth issues, coupled with the inverted yield curve, increases the
odds that the next move from the Bank of Canada could be an
interest rate cut.
There were no surprises in the Bank's policy announcement, as
the Bank believes that "the current degree of monetary policy
stimulus remains appropriate."
Some of the Bank's domestic hawkish comments include the robust
second-quarter real GDP growth, higher energy production, and solid
export growth. The housing market recovery is gaining momentum,
which is resulting in a faster-than-anticipated upturn. Wages and
labor income growth are also strong. Outside of Canada, upbeat US
growth is being driven by resilient household consumption and
government spending.
Some of the Bank's dovish comments include "escalating" trade
conflicts and weaker commodity prices amid softening global growth.
This is being reflected in many economies, including Canada, having
inverted yield curves. Global uncertainty is holding back
non-residential investment. Canada's big drop in machinery and
equipment in the second quarter was harsh, highlighting Canada's
vulnerability to global market conditions. Plus, the US-China trade
dispute is weighing on global trade. Although wage growth was
strong in the second quarter, household spending was tepid.
On balance, the no change in interest rates was widely expected
as the upside and downside risks to the outlook are still
relatively evenly split. The sticky situation for the Bank is what
to do next. Given what is unfolding on the global stage as other
central banks easing monetary policy, coupled with slow economic
growth and soft commodity prices, it is easy for the downside risk
profile to gain momentum. A cut in interest rates would support the
ongoing recovery of non-residential investment. Yet a rate cut may
lead to an overheated housing market and worsening household
indebtedness. With these opposing issues, fiscal policy will be a
useful tool to help tackle these lingering headwinds, especially
with an upcoming federal election this autumn.
Posted 13 September 2019 by Arlene Kish, M.A., Director – Economics, IHS Markit
