BoC holds rate, but downgrades growth outlook

The Bank of Canada (BoC) left the overnight lending rate unchanged at 0.5% Wednesday. Generally the tone of the meeting was dovish as Bank Governor Stephen Poloz acknowledged that the Governing Council actively discussed the possibility of adding additional monetary stimulus at the meeting as economic slack continues to exert downward pressure on inflation. In spite of that acknowledgement, the Bank did not indicate that a future rate cut was imminent.

At Invesco Fixed Income, we believe the statement and press conference is positive for both equities and fixed income, as monetary conditions will continue to remain very accommodative. In addition, I believe the Canadian dollar should remain under pressure to weaken.

Poloz said the Bank expected the economy to rebound during the second half of the year, as exports, oil production and rebuilding activity in Alberta improved from the first half. The two areas of potential weakness he focused on were exports and the housing market.

Exports, although improving versus the first half of the year, had not rebounded to projected levels, leading Poloz to describe the weakness as structural and not cyclical.

The addition of a property-transfer tax for foreign buyers in the Vancouver area together with the recently announced federal measures to promote stability in the housing market are expected to bring some measure of future weakness in housing prices and home-sales activity.

The Bank’s economic projections were updated in the Monetary Policy Report. GDP growth is expected to be 1.1% in 2016 (previously 1.3%) and 2.0% in 2017 (previously 2.2%). The output gap (the difference between the actual output of the economy and the maximum potential output of the economy) is not expected to be closed until mid-2018, about a half-year later than previously expected. Inflation expectations were described as “well anchored” and future inflation was projected to be close to 2% in 2017 and 2018.¹

Even though there is a modest increase in the possibility of a future rate cut by the BoC, I do not believe it is likely they will cut rates in the next couple of quarters as the Bank will likely prefer to see the full impact of the new housing rules and the effect of the rebound in oil prices before making the decision to cut.