The Bank of Canada resisted pressure from investors by declining to signal it will soon follow global peers in easing monetary policy.
At a decision Wednesday, policy makers left interest rates unchanged for a seventh straight meeting and said stronger than expected growth, as well as inflation on target, means current levels of stimulus are where they should be. That’s despite the escalating trade war between China and the U.S. undermining global economic momentum.
The Bank of Canada’s reluctance to signal a greater willingness to cut rates — which makes it an outlier as counterparts around the world ease policy — may come as a surprise to some investors and analysts who had expected more dovish language and some easing later this year. The Canadian dollar rose after the statement.
“This is a bit more hawkish than we anticipated,” said Brett House, deputy chief economist at Bank of Nova Scotia. It’s “not a clear change in bias. It doesn’t close the door on an October cut, but it doesn’t set up an October cut either.”
Wednesday’s narrative underlined trade risks and reiterated that Canadian growth is likely to slow in the second half of this year — all of which suggests policy makers are far from confident about the economic outlook and could be keeping the door open for increasing stimulus if things worsen.
Global Easing
But the net effect of the statement is a continuation — at least explicitly — of the central bank’s reluctance to show its hand on whether it plans to join other central banks like the Federal Reserve in easing policy, preferring instead to wait for more concrete signs of weakness before moving.
“In sum, Canada’s economy is operating close to potential and inflation is on target. However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies,” the central bank said in its statement. “In this context, the current degree of monetary policy stimulus remains appropriate.”
The Canadian dollar rose 0.4% to C$1.3280 per U.S. dollar at 10:09 a.m. Swaps trading suggests investors are fully pricing in a cut by December, with strong odds of a second by this time next year. That’s still less than the four rate cuts priced by the Federal Reserve over that time.
“The Bank of Canada is stalling but it will eventually be peer-pressured into interest-rate cuts,” Frances Donald, chief economist at Manulife Investment Management Ltd., told BNN Bloomberg.
Waiting too long is a risky strategy that could backfire if policy makers are late to recognize spillover effects on businesses and households, particularly since the country’s outlier status on policy could fuel gains in the Canadian dollar.
Bank of Canada officials said they will pay close attention to “global developments and their impacts on the outlook for Canadian growth and inflation.”
The case for cheaper money isn’t as compelling in Canada as it is elsewhere. A strong run of economic data affords the Bank of Canada opportunity to resist — as it has so far — the dovish turn in global policy.
Interest rates also remain stimulative in real terms, and borrowing costs have already declined sharply in the country because of falling global bond yields — a development the Bank of Canada cited in its statement. But escalating tensions between China and the U.S. are getting tougher to overlook. Trump’s tariffs on imports from China have already become a major reason behind global factory weakness.
The Bank of Canada characterized Canadian second quarter growth of 3.7% annualized as “strong” but noted some of the strength was probably temporary and pointed out that consumption spending was unexpectedly soft.