BoC Keeps Rate Cut Prospects Alive

• Overnight rate held at 1.75% for a 15th straight month
• Near-term growth projections revised lower
• Dovish policy statement sends loonie lower

After a neutral speech from Governor Poloz just two weeks ago, the Bank of Canada sounded decidedly more dovish in today’s policy statement. Economic data over the last three months were described as “mixed” but the bank’s characterization was rather downbeat, noting signs of weaker exports, business investment, job creation, and consumer confidence and spending. It did note solid growth in the housing sector, but didn’t seem to fret about associated financial stability risks—another dovish development. While some of the slowdown in GDP growth in late-2019 was attributed to temporary factors, the BoC is also concerned that Canada’s economy is being more negatively impacted by global headwinds than previously thought. Even with positive trade developments and signs that the global economy is stabilizing, “a high degree of uncertainty” remains.

The BoC still expects GDP growth will pick up as 2020 progresses, supported by modest growth in business investment and exports and an increase in household spending (which will get some help from recent tax cuts and solid population growth). But with the economy no longer seen as operating close to full capacity, the bank’s tolerance for sub-trend growth is likely to be limited. Today’s statement makes us more comfortable with our call for a rate cut in April, and market odds of a move by mid-year are now slightly above 50%.