BoC patience to be tested by sub-trend growth – RBC

Analysts at RBC Capital Markets pushed back their forecast for an interest rate cut from the Bank of Canada to the second quarter of 2020.

Key Quotes: 

“The  Bank of  Canada left its policy rate unchanged in early-December,  cementing its status as a holdout in 2019 while some 40 other central banks, including the Fed, lowered rates. The BoC sounded more comfortable on the sidelines than in October when it openly discussed a rate cut. In an economic update following the decision, Deputy Governor Lane noted that recent developments gave Governing Council “more confidence” in its October forecasts.”

“The BoC’s more neutral tone suggests a January rate cut (our previous forecast) is unlikely.  But we continue to think persistently sub-trend growth —including lacklustre investment and exports— will test the  BoC’s patience and result in a  rate cut in  Q2. Such a  move would provide a  bit of relief to highly indebted  Canadians,  particularly those renewing mortgages in  2020.  That  said,  if  recent  strength  in  the  resale  market persists, the BoC might be reluctant to spur on activity (and increase household vulnerabilities)  by lowering rates.” 

“Fiscal policy could also give the  BoC cause for patience. The government just announced that a promised increase in the basic personal amount (benefiting most Canadian taxpayers, at a cost of about $3 billion next fiscal year) will take effect at the start of 2020, slightly earlier than  we expected.  If that modest fiscal boost is followed by further  near-term stimulus,  it might convince the BoC that additional monetary policy support is unnecessary.”