BoC: A cut in April to dampen enthusiasm for the loonie

On Wednesday, the Bank of Canada kept its monetary policy unchanged but it opened the doors to a rate cut, weakening the loonie (CAD) across the board. Analysts at CIBC consider the central bank could cut interest rates in April.

Key Quotes:

“The Bank of Canada is keeping its fingers crossed that the economy will pick up after a soft fall and winter, but it’s no longer quite as sure of itself these days. As a result, while it kept interest rates unchanged today, and its economic forecast has the skies clear by spring, it conceded that there’s a risk that the sluggish trend could persist, a hint that a rate cut could still be in the offing ahead. That won’t be the case if growth and inflation follow the base case outlined in the forecast, which remains generally sunny enough.”

“So although the 2020 forecast was downgraded a bit due to recent disappointments, the 1.6% growth rate for the year as a whole implies an acceleration to better than 2% growth after Q1, and feeds into a 2.0% pace for 2021. If that’s the case, it’s reasonable to assume that inflation will also hug close to the target, and that tight labour markets will continue to sustain the faster pace that we’ve seen of late in wage growth.”

“If, as we expect, slow GDP growth prompts softer hiring and a climb in the jobless rate ahead, it will not only be less easy politically to keep rates where they are, but it will also add to downside risks to household confidence.”

“By convention, the Bank assumes a constant Canadian dollar in its published statement. But the currency was gradually appreciating prior to the more dovish statement today, a risk to the Bank’s projection for better export performance ahead. Failing to deliver on market chatter about a rate cut would risk a further C$ appreciation that, in our view, an economy stuck with persistent trade deficits and cautious consumers can’t afford. We look for a quarter point cut in April to dampen enthusiasm for the loonie. But that might be enough if, by the latter half of the year, there’s also a bit more reason to conclude that 2021 will be a better year global.”

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