We would argue that the Bank of Canada should strongly consider cutting rates in the near term.
Canadian money markets imply that the Bank of Canada will remain on hold at 1.75% at the interest rate announcement on Jan. 22. The implied probability of a rate change that day is nearly zero, according to the futures market. But we do think that the decision is a close call.
While maintaining the overnight rate at 1.75% would appear to be prudent at the very least, we would argue that the Bank of Canada should strongly consider cutting rates in the near term.
With the economy growing at less than 2% and stuck in first gear, the economy will most likely need a boost given the degree of economic stress and geopolitical upheaval occurring across in global markets. Moreover, given the uncertainty of and length of time to enact and implement a fiscal response to Canada’s economic slowdown, the central bank should strongly consider putting in place a preventative rate cut.
The Bank of Canada’s overnight rate has been held at 1.75% since October 2018 — a 15-month pause that interrupted the bank’s program of normalization of interest rates away from the zero bound.
But there are repercussions for maintaining interest rates at such low levels and for so long, which will factor into the Governing Council’s rate decision.
Bank of Canada Governor Stephen Poloz recently outlined areas under consideration for 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.
As to global trade, Poloz suggests that despite the decline in tensions, the damage to the economy “will likely be permanent,” 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.
