Bank of Canada hints at downward revisions to growth outlook - RBC CM

As widely expected, the Bank of Canada kept the key interest rate unchanged at 1.75%. Josh Nye, Senior Economist at RBC Capital Markets explained BoC maintained their tightening bias and they forecast two rate increases next year.

Key Quotes: 

“What a difference six weeks makes. In late-October, the Bank of Canada raised the overnight rate, dropped their “gradual” guidance and indicated interest rates would need to rise to a neutral stance to keep inflation on target. That had markets pricing in more tightening next year, and even some likelihood of another hike before year end. Fast-forward to today and there was no chance of the BoC lifting rates this morning. A sharp decline in global oil prices, wide discounts on Canadian crude, and a Q3 GDP report that was very soft in its details have all dented the economic outlook as we head into 2019. The BoC acknowledged as much, noting activity in Canada’s energy sector will be “materially weaker” than expected (Alberta’s mandatory production cuts also a factor there), and that the economy might have more room for non-inflationary growth than previously thought due to both GDP revisions and likely slower near-term growth.”

 “It wasn’t all bad—policymakers attributed Q3’s weak business investment to trade uncertainty and remained optimistic on the non-energy capex outlook given USMCA, accelerated depreciation and capacity constraints. And once again there was mention of two-sided risks around trade policy, even if there are signs that trade tensions are “weighing more heavily” on the global economy. But those mitigating factors weren’t enough to keep the Canadian dollar from selling off on today’s announcement.”

“The BoC maintained their tightening bias, still planning to eventually raise rates to a neutral range (2.5-3.5% by their estimate). But they were right to give no timeline for that adjustment. Our forecast assumes two rate increases next year, which would leave monetary policy slightly accommodative. As market pricing indicates, there is a growing risk that tightening doesn’t resume in January as we have been expecting.”