Is the Bank of Canada slashing interest rates?

It is more likely than not that the Bank of Canada holds the interest rate at 1.75% on Wednesday, but there’s a growing chorus that believes it will decrease the rate before the end of the year.

“If we were only looking at domestic factors, we might think that the Bank would soon start to consider further rate hikes,” said Capital Economics’ Stephen Brown. “Economic growth is on track to outperform the Bank’s forecasts in the second quarter and core inflation has risen in recent months. But outside of Canada, trade tensions have grown, there are signs that U.S. GDP growth is slowing, and the Fed has signalled that it will soon cut rates. We suspect that the next move will be a cut.”

Dalhousie University’s Lars Osberg believes an interest rate cut is coming sooner rather than later.

“Sudden global trade softness,” he said.

However, neither a rate hike nor decrease is likely Wednesday because of headwinds from abroad, according to the Conference Board of Canada’s Alicia Macdonald.

“While some data suggests that the Canadian economy is indeed emerging from its recent slump, there remains a significant risk to the global economic outlook due to global trade tensions,” she said. “With a fair degree of slack in the domestic economy, the Bank of Canada can afford to be patient before moving interest rates.”

The Canadian economy is growing, albeit slowly, and inflation is in the Bank of Canada’s target range, which is why an interest rate decrease may not, in fact, be on the horizon.

“A rate increase is unnecessary without sustained upward price pressure,” said Concordia University’s Moshe Lander, an economics lecturer. “There is little room for a rate decrease since the overnight rate is already so  low, so it’s best to wait until there is economic data that warrants a cut.”

There’s been more job creation in Canada in the first fourth months of this year than in all of 2018, and according to Brett House of Scotiabank, there will be faster growth over the next few quarters because Canadian conditions are quite different from those south of the border.

“Canada’s major macroeconomic activity indicators continue to rebound from a soft patch at the turn of the year and inflation is near the Bank of Canada’s target,” he said.

 

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