BOC Left Rate Unchanged at 1.75%. Cautious about Trade But Overall Tone Stays Neutral

Central banks news

BOC left the policy rate unchanged at 1.75% yesterday and maintained a neutral tone. Policymakers turned more cautious about the impact of trade tensions on economic activities and noted that global interest rates have been lower over the past months. Yet, they acknowledged that domestic growth remained upbeat. While raising the GDP growth forecast for this year, the members downgraded the forecast for 2020. Despite higher growth expectations, inflation outlook for this year was taken slightly lower. Yet, it remains within the central bank’s target. While BOC would be closely monitoring developments of trade tensions, current economic developments suggest that it can maintain the monetary policy unchanged for the rest of the year.

BOC sounded more cautious about global trade tensions. In the policy statement, it noted that “evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook”. It added that “trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices”. The potential impacts have been incorporated in the economic projections in April and this month, although the central bank reinforced that “escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks.

Domestically, Canada’s economy is “returning to growth around potential”. The strong performance in consumption is supported a “healthy labor market”. Stabilization in the housing market has also been supported by decline in mortgage rate. BOC also noted that as “slack in the economy is absorbed and these temporary effects wane, inflation is expected to return to +2% by mid-2020”.

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Reflecting both global and domestic developments in economic forecasts, GDP growth for this year is revised higher to +1.3%, from April’s +1.2%. This is likely a response to the upside surprise in 2Q19. Growth for 2020 is lowered to +1.9% from 2.1%, while that for 2021 stays unchanged at +2%. On inflation, the members expect headline CPI to stay at 2% y/y in the three years through to 2021. While this signals a downgrade for this year from April’s +2.1%, inflation should stay within BOC’s target.

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