October 30, 2019 | 11:05
BoC: Bank of Constancy, for Now
The Bank of Canada kept its key interest rate unchanged today at 1.75% for the eighth consecutive meeting—the most recent rate change from the Bank was a hike just a little more than a year ago. Markets were nearly unanimous in expecting no move again today; so, the focus fell on the tone of the Statement, and any hints on possible rate cuts ahead. In the event, the message landed on the dovish side of expectations, with plenty of concern focused on trade uncertainty and a weak business investment backdrop. While there certainly was no clear roadmap for next steps (in keeping with Governor Poloz's disdain for forward guidance), the Bank flatly stated that it "will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment". The Bank somewhat downplayed the strength in jobs and housing, while highlighting trade risks and capex weakness. It's patently obvious that there are serious downside risks to our call of no change by the Bank over the next year—particularly with the rest of the world cutting, or poised to do so.
The Bank also released its quarterly Monetary Policy Report, along with an updated economic forecast. There were no major changes in the outlook, with this year's bump-up in GDP mostly reflecting the robust Q2 result (i.e., ancient history), offset precisely by a shave in next year's forecast (see table). This brings their call right in line with our forecast, and now quite close to consensus as well. The Bank also trimmed its 2021 call by two ticks, but the new 1.8% estimate is simply bang on potential growth.
Oftentimes, the special boxes in the MPR reveal what the Bank is most concerned about, and the topics this quarter were mortgage renewals (no major issues there) and another look at a downside scenario for global growth. In the latter case, they believe a much more serious deterioration in the trade war and a related drop in commodity prices could carve more than 4 percentage points from the level of Canadian GDP. Note that the Bank already estimates that the trade actions to-date will chop 2 percentage points by 2021—that's 0.4 ppt more than they estimated in July (as the trade battle intensified over the summer).
As for the Statement, some of the key quotes were as follows:
Bottom Line: The Bank of Canada appears to have abias to cut rates, and we may be just one more serious global trade accident away from them acting on that bias. And, assuming the Fed does indeed trim again later today, the Bank is about to be the proud owner of the highest policy rate in the advanced world (albeit at a tame 1.75%). But, until such an "accident" (or shock), the Bank will likely hang tight on the sidelines as long as core inflation holds near 2%, growth stays close to potential (1.5%-to- 2.0%), and the Canadian dollar doesn't blast higher. It's pretty safe to conclude that if the Fed feels the the need to cut again after today, the Bank will be doing so as well.
Next up: The BoC's press conference @ 11:15 am ET ..