BOC Unexpectedly Turned More Upbeat in December

BOC left the policy rate unchanged at 1.75% in December. The accompanying statement turned more hawkish than October. Despite ongoing trade war uncertainty, policymakers remained upbeat about the domestic economic growth. They also acknowledged that the global economy has stabilised. It now appears that the central bank would prefer to leave the policy rate on hold for an extended period of time. The possibility of a rate cut hinges on unexpectedly severe deteriorated in economic developments at home and across the globe.

The members appeared more upbeat on the global economy. As suggested in the accompanying statement, the October projections remained “intact” with “nascent evidence that the global economy is stabilizing”. It added recession concerns were “waning”. However, the statement reiterated that uncertainty related to trade conflicts continued to weighed on global economic activity, and remained “the biggest source of risk to the outlook”.

Domestically, the central bank acknowledged the slowdown in the third quarter GDP growth. Yet, it took note of the “moderate” expansion in consumer spending and “strong” wage growth. It added that the central bank would be “assessing the extent to which this points to renewed momentum in investment”. On inflation, BOC retained the view that it will “track close to the 2% target over the next two years”.

– advertisement –

Unlike the October meeting, at which the members first hinted the possibility of an “insurance” rate cut, the members affirmed in December that future interest rate decisions will be guided by the central bank’s “continuing assessment of the adverse impact of trade conflicts”. In particular, it would weigh the uncertainty against “the sources of resilience in the Canadian economy—notably consumer spending and housing activity”. Meanwhile, BOC added that it would incorporate the impact of fiscal policy into its macroeconomic projection in January.