September 04, 2019 | 10:41
BoC Policy Announcement — Fall-Time Ahead for Canadian Rates?
The Bank of Canada kept its key overnight lending rate unchanged today at 1.75% as widely expected, and gave only some muted signals that a change may be in the offing. The rate has been pegged at this level since last October, but the tone of the Statement left the Bank with the option to trim this October. In its first public comments since the early July rate decision, the Bank highlighted the steep escalation in global trade risks. While this was partially offset by the strong Q2 GDP results of last week (seen as temporary), and a firming housing market, the BoC left little doubt where the focus will be—squarely on trade developments.
Some key quotes from the Statement (emphasis ours):
On the trade war: "As the US-China trade conflict has escalated, world trade has contracted and business investment has weakened. This is weighing more heavily on global economic momentum than the Bank had projected in July." The BoC also notes the inverted yield curve and rate cuts by many other central banks, but makes no further judgment on the deep dive in yields.
On growth: "In Canada, growth in the second quarter was strong and exceeded the Bank’s July expectation, although some of this strength is expected to be temporary. Housing activity has regained strength more quickly than expected as resales and housing starts catch up to underlying demand, supported by lower mortgage rates. This could add to already-high household debt levels, although mortgage underwriting rules should help to contain the buildup of vulnerabilities." The last point is notable; one of the key reasons we thought the BoC would be reluctant to cut rates was because of concerns about re-igniting housing—the Bank is downplaying such concerns here, keeping the door ajar for a rate trim.
On inflation: "CPI inflation in July was stronger than expected, largely because of temporary factors. These include higher prices for air travel, mobile phones, and some food items." Again with the "temporary".
On the policy outlook: "As the Bank works to update its projection in light of incoming data, Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation." This comment comes right after their rote suggestion that the current stance of policy is appropriate...but...they will be monitoring trade developments with an eagle eye.
On balance, the remarks are still in tune with our revised call of a 25 bp rate trim at the October 30 meeting, but the Bank is not committing to anything. Policymakers have another eight full weeks before the next decision, including two full months of jobs and CPI releases, and (likely) another Fed rate cut, and even a Federal election in the meantime. Clearly, much will ultimately depend heavily on how the US/China trade war plays out; but, given that we are not optimistic on that front, we lean to a rate cut in late October.