Poloz Puts Canadian Rates Firmly on Hold Amid Global Trade Risks

Daniel Fowler
July 11, 2019

The Bank of Canada, which was widely expected to stand pat Wednesday, said it will continue to monitor data ahead of future decisions with a particular focus on developments in the energy sector and the effects of global trade tensions.

Growth: The Bank of Canada kept interest rates unchanged at 1.75% as expected. The Bank of Canada cut its forecast for economic growth next year to 1.9 per cent from 2.1 per cent, a decent-but-unspectacular pace that won't generate much inflation pressure.

"Recent data show the Canadian economy is returning to potential growth".

Meanwhile, Fed Chairman Jerome Powell reinforced expectations the US central bank will cut interest rates for the first time in a decade at its next monetary policy meeting later this month, saying trade uncertainties and concerns about the global outlook continued to exert pressure on the American economy.

The central bank said Canada's economy appears to have performed better than predicted in the May to June period, a welcome rebound from temporary weakness at the end of 2018 and in the first three months of 2019. It sees the economy slowing to 1.5 per cent in the current quarter.

By contrast, the Federal Reserve is expected to cut benchmark USA interest rates as soon as the end of July.

Market Response: In reaction to the more cautious BoC statement, the CAD drop against the Dollars with USDCAD back above the 1.3100 handle to test the top of its recent range at 1.3140. We are anticipating a couple of rate cuts from the Fed. Market pricing suggests investors aren't expecting Poloz to match cuts by the Federal Reserve over the next year.

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"The bank is going to want to nudge interest rates up a little bit more, so that they have a bit of ammunition when the next downturn hits".

BoC maintains interest rates as expected at 1.75%.

But the bank cautions that "ongoing trade conflicts and competitiveness challenges are dampening the outlook for trade and investment".

In Canada, increased Chinese trade restrictions on canola and meat exports were estimated to reduce Canadian exports by 0.2% over the second and third quarters.

"Escalating trade conflicts, geopolitical tensions and related uncertainty are contributing to the broad-based slowdown of global economic activity", the bank said in its report. Oil prices have continued to rebound.Yesterday, API data showed U.S. crude inventories dropped 8.1 million barrels in the week ending July 5.West Texas Intermediate oil jumped to $59.28 U.S./barrel overnight after touching $57.40/b, yesterday.Additional support stems from supply disruption concerns due to elevated U.S./Iran tensions and the Organization of the Petroleum Exporting Countries and Russian Federation decision to extend production cuts until March 2020.

Sal Guatieri, a senior economist with BMO Capital Markets, said the risks to the Bank of Canada's policies "are more even-handed" than its US counterpart, which could push through more than one cut. Traders had bet the Bank of Canada would not follow suit, helping push the Canadian dollar to near eight-month highs against the greenback.

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