For the eighth time in nearly a year, the Bank of Canada has left the overnight interest rate untouched, holding steady at 1.75% this morning, as it continues to monitor a slowing economy that will be “increasingly tested” by global trade conflicts.
The bank was guarded in its tone today as it expressed concern over the resiliency of Canada’s economy against ongoing trade conflicts. That tone hints at potential rate cuts in the future if things get worse, though on Wednesday the bank said it still finds it appropriate to maintain the current rate target.
“The outlook for the global economy has weakened further since the Bank’s July Monetary Policy Report (MPR),” the bank said. “Ongoing trade conflicts and uncertainty are restraining business investment, trade, and global growth.”
“Governing Council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist.”
The bank also released its October 2019 Monetary Policy Report today, where it re-emphasized the issue:
“Trade conflicts are weakening the world economy,” the report states. “Global economic growth is expected to slow to below 3 percent in 2019, its weakest pace since the 2007–09 global economic and financial crisis.”
Calls for a cut were short-lived
It’s been challenging for economists this year to pin down the bank’s moves.
For the last several months, economists were calling for at least one cut before the end of 2019, with many predicting one to come at today’s meeting. That was plausible, given a few economic factors.
Number one: the Yemeni drone strike on a Saudi oil field on Sept. 15, where more than 5% of global oil production capacity was taken offline, made for concern over how gas prices in Canada would fare, but they escaped relatively unscathed.
Number two: the U.S.-China trade war continues to wage on, albeit softening some, and has slowed global economic growth. In September, the Organisation for Economic Cooperation and Development (OECD) said the trade war was responsible for “plunging” global growth to its lowest point since the 2008 recession.
The International Monetary Fund cut its global growth forecast earlier this month, citing the trade war as a primary factor, and warning of the serious risks of a global slowdown.
Number three: We’ve now seen two cuts this year from the Federal Reserve, which marks the first two times in a decade that it cut interest rates. And another cut is expected at this afternoon’s announcement. In fact, interest rates are on a global downward trend. Mexico slashed its interest rates in early September for the first time in five years in an effort to salvage a faltering economy; and negative mortgage interest rates are beginning to see a resurgence in a few places around the world.
All that said, over the last few weeks, the collective prediction among Canada’s economists with respect to what the bank would do at today’s meeting started to shift — for a few reasons:
1. Big gains in employment
According to Statistics Canada, the country gained nearly 54,000 new jobs in September, bringing the unemployment rate down from 5.7% to 5.5%. From August to September alone, the country gained 28,200 jobs, according to ADP Canada.
This good news on the labour and employment front prompted some commentators to say goodbye to a rate cut at Wednesday’s meeting.
“Employment is showing continuing strength and wage growth is picking up,” the bank said in today’s announcement.
2. Improved business sentiment
At its last announcement, the bank said that “business investment has weakened.” But in its fall Business Outlook Survey last week, the bank saw an improvement in business sentiment in much of Canada.
CIBC Capital Markets’ chief economist Avery Shenfeld said in a note last week: “The Bank of Canada's Outlook Survey is both a set of qualitative data, and also a chance for the central bank to put a spin on what that data actually say, so the central bank's use of the word ‘healthy’ to describe hiring and capital spending intentions outside the energy provinces suggests that it's not inclined to cut rates just yet.”
Still, in today’s MPR, the bank said that trade conflicts are hurting global investment.
“Business investment and exports are likely to contract before expanding again in 2020 and 2021,” the bank said.
3. Inflation right on target
As of September, inflation was at 1.9%, which is just one percentage point shy of the Bank’s preferred 2% target, which may have also deterred it from making any drastic moves with interest rates today.
Today, the bank said that measures of inflation “are all around 2 percent.” It does expect CPI inflation to dip in 2020, though that dip will be temporary. This, it said, is “the effect of a previous spike in energy prices fades.”
“Overall, the Bank expects inflation to track close to the 2 percent target over the projection horizon.”
4. Increased consumer spending
At the September announcement, the bank said that “consumption spending was unexpectedly soft” in the second quarter. There seems to be an improvement on this front as well. According to a report from BMO’s senior economist, Jennifer Lee, consumer spending in August was up in the areas of electronics/appliances, sporting goods, and jewelry and luggage products.
“Those are discretionary areas that would be one of the first things to cut back on in dire times,” wrote Lee. “With.... consumers still spending on ‘wants’, there is little reason for the Bank of Canada to do anything this year.”
“Consumer spending has been choppy,” the bank said today, “but will be supported by solid income growth.”
The bank did say that the Canada-US exchange rate is still hovering near where it was in July and that the loonie “has strengthened against other currencies.”
5. A rebounding housing market
An encouraging housing outlook report from CMHC revealed that home sales and prices in Canada are poised to start their recovery in 2020 — another positive marker that could have swayed the bank’s decision to hold today.
“. . . housing activity is picking up in most markets,” the bank said. “The Bank continues to monitor the evolution of financial vulnerabilities in light of lower mortgage rates and past changes to housing market policies.”
The Bank of Canada mentioned in its last announcement that this housing activity could “add to already-high household debt levels.”
We learned this week from insolvency firm MNP that Canadians are absolutely inundated with debt repayments. According to a survey conducted by MNP, 47% say they will struggle to cover living costs over the next 12 months without taking on more debt.
The bank didn’t specifically call attention to household debt in its announcement today. But in its MPR said “given their high levels of debt, households are expected to be cautious in their spending decisions.”
Real concerns linger over economy’s resilience
“In considering the appropriate path for monetary policy, the Bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment,” the bank said.
“In this context, it will pay close attention to the sources of resilience in the Canadian economy – notably consumer spending and housing activity – as well as to fiscal policy developments.”
The Bank is expecting real GDP to grow by 1.5% this year, by 1.7% in 2020 and 1.8% in 2021.
As these things go, all eyes will now be on the next announcement, on December 4.
Prior to Wednesday’s announcement, a rate cut wasn’t looking like a sure bet by then, either. According to Reuters, chances of a December cut have fallen to about 10%. But the new cautious tone we saw at this announcement could lay the groundwork for a cut at one of the next few meetings.
And last week the C.D. Howe Institute updated its recommendation for the bank’s next move, saying it should cut to 1.50% by spring of 2020 instead of its initial suggestion of 1.25%.
But experts will now be watching the bank intently. It’s continued to behave much more guardedly than other central banks in not lowering interest rates, but that could soon change.
“The Bank of Canada was content to leave its chips on the table, betting that rates are already low enough to provide a cushion against slowing global growth, for now,” said Shenfeld in a note after this morning’s announcement. “That said, the door was left ajar for a cut down the road.”