The Bank of Canada held its overnight interest rate at 1.75% on Wednesday as the central bank kept its powder dry ahead of an uncertain path of growth in the domestic economy in 2020.
The tone of the policy statement would imply that the Bank of Canada stands ready to cut rates to bolster the domestic economy should growth slow.
Given that the central bank implied a downward revision in its growth forecast, this should reassure investors and policymakers that the bank will not remain on the sidelines for the remainder of the year.
The bank’s overnight rate has remained at 1.75% since October 2018 — a 16-month pause covering 10 straight meetings that interrupted its program of normalization of interest rates away from the zero bound.
While, maintaining the overnight rate at 1.75% is prudent at this time, we expect that a slower pace of domestic growth would cause the Bank of Canada to strongly consider cutting rates in the near term. In our estimation, an economy stuck in first gear will most likely need a boost given the degree of economic stress and geopolitical upheaval occurring across in global markets.
Bank of Canada Governor Stephen Poloz recently outlined factors that could influence the direction of monetary policy, including the damage to global growth caused by threats to global trade, the degree of accommodation in the financial markets, and the impact of a strong labor market on household debt.
Given the recent downward revision to the global growth outlook by the International Monetary Fund and our estimation of Canadian financial conditions, which implies a below-neutral outlook, both suggest a rate cut this year.
Moreover, despite a recent easing of trade tensions, the damage to the economy “will likely be permanent,” as Poloz said, with global GDP “around 1% lower than it would have been without the trade conflict.”
Indeed, Canadian growth in the third quarter of 2019 was a paltry 1.3%, and consensus expectations are for the malaise to extend into 2020.