The Bank of Canada held its key interest rate at 2.75 per cent on Wednesday as Canada’s overall economic resilience and ongoing trade tensions with the U.S. provided sufficient cause to keep the policy rate steady.
Like its neighbour to the south, the Canadian economy appears to be sufficiently strong enough to absorb the body shots caused by the disruption in trade. In particular, private sector firms appear to be hiring at a solid pace and are simply getting on with business despite U.S. trade tensions. Should this continue, it will slowly bring down the unemployment rate and free up the Bank of Canada to resume cutting rates in the near term.
RSM’s core baseline forecast is that the Bank of Canada can—and should—cut rates twice this year. Today’s decision supports that view and we are confident that rate cuts during the final half of the year will bolster the economy and bring down unemployment.
As trade negotiations continue between Canada and the U.S., the central bank needs to wait for clarity regarding trade taxes on exports into the U.S. so it can create a credible forecast on growth, employment and inflation going forward.
Regarding recession concerns, the probability of one happening in Canada in the next 12 months is more predicated by the outcome of current trade negotiations rather than the bank’s decision to hold rates steady today. As the Bank of Canada moves to cut rates, we expect to lower that probability later this year.
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