It seems the Bank of Canada may not cut rates next week, after all. What happened?

By: Lisa Coxon on October 23, 2019

Since the Bank of Canada’s last overnight interest rate announcement on Sept. 4, chatter amongst economists suggested that a rate cut was anticipated before the end of the year, and even likely to come at next week’s announcement. But now the forecast appears to have softened, with experts no longer predicting a cut on Oct. 30 — and pricing in slim odds of any cut this year.

What changed?

Improved hiring is helping

Well, for starters, the Canadian economy gained nearly 54,000 jobs in September, according to Statistics Canada, causing the unemployment rate to drop from 5.7% to 5.5.%. According to the Financial Post, analysts had expected only a mere 7,500 and 10,000 new jobs.

“Canada’s labour market seems to have been vaccinated against the global economic flu going around,” said CIBC chief economist Avery Shenfeld in an October note. 

“A jobless rate of only 5.5% will cement the case for the Bank of Canada to remain on hold in October, but we continue to look ahead towards the global slowdown impacting Canadian data over the balance of the year.”

Businesses are more optimistic 

Business sentiment has also improved slightly, according to the bank’s fall Business Outlook Survey released on Tuesday. Not everywhere, though. “Positive views in Central Canada contrast with widespread weakness in the Prairies,” the bank said.

Still, that survey, which relies on interviews with those in senior management positions at 100 companies has given economists reason to believe that the Bank of Canada will not cut at next weeks’ meeting. Despite ongoing trade tensions between the U.S. and China, business investment in Canada seems fairly solid for now.

“Ultimately, with the themes in today's report reflecting the broader economic themes this year, there is little reason for the Bank of Canada to change strategy,” Brian DePratto, a senior economist at TD Economics, wrote in a report.

“Until and unless the domestic data begins to meaningfully turn negative, the Bank will be comfortable to remain on the sidelines even as its advanced economy peers continue to ease their monetary policies.”

In the U.S., the Federal Reserve has already cut its key interest rate twice this year.

Inflation is staying tame

Inflation in Canada, which was at 1.9% in September, is also running very close to the bank’s target of 2%. This could also give it little reason to move the interest rate from the current 1.75%.

“As both headline and core inflation measures are tracking the Bank of Canada’s 2-per-cent target, there’s no reason for monetary policy makers to give a heavy weighting to consumer prices in their upcoming deliberations,” CIBC World Markets’ senior economist Royce Mendes told the Globe.

Lastly, a real estate market that is showing real signs of normalizing is likely to give the bank hesitation on cutting rates. Both home sales and prices are on the rise, suggesting that Canada’s housing market is making a recovery. Sales grew by 0.6% in September, as did benchmark home prices, by 0.5%.