July 10, 2019 | 11:02
BoC Policy Announcement and MPR — Trade Worries Darken the Outlook
The Bank of Canada held rates steady at 1.75% today, as fully expected. While the bar to move rates remains quite high, there's clearly more caution than in the prior statement from late May. The policy statement was littered with references to trade tensions (five separate mentions for those counting), with the Bank highlighting that as the "biggest downside risk to the global and Canadian outlooks." Accordingly, there were material revisions to the outlook, with global growth prospects cut for 2019 (3% from 3.2%) and 2020 (3.2% from 3.3%). Those downgrades were driven mostly by emerging markets and non-G3 economies. In fact, the U.S. GDP projection for 2019 was upgraded two ticks to 2.5%, while 2020 was flat at 1.7%, both a tick above our call.
The Canada forecasts were mixed, with Q2 GDP raised 1 ppt to 2.3%, while Q3 was introduced at 1.5%. The firmer Q2 lifted the 2019 call a tick to 1.3%, though the softer second half trimmed 2020 by two ticks to 1.9%. Taken together the projections for Canadian and global economies saw a net downgrade making the overall tone from the BoC as a bit more dovish than in May.
Notable tidbits from the policy Statement:
Impact of trade wars...The key phrase, as noted above, was likely that the "Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks." Indeed, the opening section of the Statement notes that while the BoC had already incorporated the negative effects of trade tensions in the prior MPR, they ramped those up further in this round of forecasting.
The domestic backdrop...While the BoC upgraded Q2 GDP growth a full ppt to 2.3%, the Statement wasn't particularly upbeat, noting that the rebound is "due to some temporary factors". That's perfectly consistent with our view, though we have Q2 growth a bit firmer at 2.5% and see upside risks from there. Housing was highlighted as "stabilizing", while there seemed to be little concern about consumption as it's "supported by a healthy labour market." And, while exports look to be hugely positive for Q2, trade tensions and competitiveness challenges are headwinds for trade and investment...certainly sounds like the BoC has little interest in seeing the loonie appreciate further.
Inflation...Not much here other than the facts. The drop in gasoline prices will heavily dampen June inflation while the core measures will likely stay around 2%. The BoC views inflation returning sustainably to 2% by mid-2020...likely when the output gap is expected to close. In case you're wondering the output gap was assumed to be -1.25% to -0.25% in Q2, unchanged from Q1.
The Statement's final paragraph once again says that the "degree of accommodation being provided by the current policy interest rate remains appropriate." And, it concludes with the following "As Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation." That's a bit of a change from May, when household spending was included in that list of things to watch. The stability in housing and some improvement in consumption growth eased worries on that front.
Key Takeaway: Not wanting to be entirely left behind amid the chorus of dovishness from global central bankers, the BoC sounded a bit more dovish today. It's clear that the trade backdrop is a significant concern for the BoC and is the single largest downside risk...that's hard to argue with. Despite the downgrade to the outlook, it's going to take a deeper deterioration to spark conversations about easing even as the Fed seems poised to lower rates at month end.
On to the press conference...