BoC Rate Decision: Much Needed Dovish Reality Check

The Bank of Canada left its overnight rate target unchanged at 1.75% this morning. It has been unchanged since last October.

The last few business days were marked by disappointing economic news. Last Friday’s dismal Canadian report showed an economic stagnation in 2018 Q4. Equifax (NYSE:) Canada also announced a modest increase in consumer delinquencies in late 2018. On Monday, the Vancouver Real Estate Board reported a 6-percent year-over-year decline in resale home prices and a 33-percent year-over-year drop in transactions in February. In the GTA, home sales fell slightly (-2.4% year-over-year), according to the Toronto Real Estate Board. Furthermore, China decided to block canola shipments coming from Canada, escalating tensions between the two countries (canola is one of Canada’s top exports to China).

In addition, the ratification of the new Canada-U.S.-Mexico-Agreement could be delayed, as both Canada and Mexico are asking U.S. authorities to cancel punitive steel and aluminum tariffs prior to ratification. Furthermore, the BoC mentioned that the slowdown in global momentum has been more pronounced than expected in January and that Canadian growth will be “weaker than projected.

Altogether, these multiple negative developments weigh more in the balance than the constructive U.S.-China talks that could soon lead to a trade deal. Thus, BoC officials are no longer saying that they “will need to raise the policy rate over time into a neutral range.” BoC officials now realize the Canadian economy needs a stimulative monetary policy stance: “Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range.” This key passage of the statement is unambiguously more dovish than in January. Also, BoC officials transparently mention it will take them time to assess for how long CPI inflation will run below the 2-percent target. Thus, the odds of seeing a 25bps policy rate increase in 2019 appear quasi-nonexistent.

This being said, the economic outlook is not dim enough to bring back a rate cut among BoC chairman Stephen Poloz’s list of options. The central bank still thinks the next move is a hike even though it may only happen in 2020 or 2021, citing “increased uncertainty about the timing of future rate increases.” Financial markets can see things differently. In our view, the growing market talk of rate cuts and Canada’s economy being on the verge of slipping into a brief contraction are unlikely to fade soon as we expect a 15K month-to-month decline in LFS employment for the month of February (the data will be released on Friday morning; consensus: flat at 0K m/m).

Bottom Line: The BoC is adjusting to the fading momentum, signalling a sticky 1.75% policy rate unless the global economic momentum strengthens. To ensure that this soft patch of economic activity does not last too long, Finance Minister Bill Morneau has a great opportunity in the March 19th budget to promote growth. After improving the deduction for business capital investments last fall, it remains to be seen if the increasing signs of household fatigue and softening housing activity in some key markets will push the federal government to announce targeted policies improving mortgage accessibility and the well-being of Canadians.

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