Bank of Canada Rate Policy Preview: Shift to neutral

• Bank of Canada is expected to leave the overnight target rate at 1.75%
• Mild tightening bias to change to neutral
• Slowing domestic and global growth will perpetuate the rate pause

The Bank of Canada will announce its latest rate policy decision at 10:00 am EDT, 14:00 GMT on Wednesday April 24th.

Forecast

The Bank of Canada will maintain its overnight target rate at 1.75% when it concludes its policy meeting on Wednesday, maintaining the pause which began last October.  The bank is expected to modify its policy announcement acknowledging that the hiatus is now policy and that data developments will determine future rates.

Reuters

Canada: Growth and Inflation

Canadian economic growth slowed substantially in 2018. From 2.86% in the fourth quarter of 2017, the Canadian economy closed last year at 1.57%.  It was the weakest growth since the second quarter of 2016. Quarterly expansion sank to 0.1% in the final three months from 0.5% in the prior three and from 0.6% in the quarter before that.

While annual inflation jumped to 1.9% in March from 1.5% in February core inflation registered just a 0.1% gain to 1.6%.

Interest Rate Announcement

The March 6^th interest rate announcement noted the global slowdown. “While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence.” “Many central banks have acknowledged the building headwinds to growth…”

After having raised rates three times in 2018 and once in 2017, 50 basis points first followed by three 25 point hikes, bringing the overnight target from 0.5% to 1.75%, there was a natural tendency to view the Governing Council’s policy as tighter until informed otherwise.

In the bank’s own words from March that time may be close at hand. “With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets and global trade policy.”

As Federal Reserve Chairman Jerome Powell modified his rhetoric from the neutral rate is far away to it being close as the slowing US and global economies rendered further rate hikes unwanted, so the Bank of Canada will conclude that its current overnight target is appropriate to economic conditions.   

The absence of rate hikes in the past seven months has been officially a pause in a tighter monetary policy. That will change and if the current overnight rate is not declared the ‘neutral rate’, (don’t expect it to be) that is what it will be by default until further notice.

Monetary Policy Report

The Bank of Canada issues this report four times a year, in January, April, September and December.  In January it projected 1.7% growth in 2019, “A little slower than we previously thought. This is mainly because of lower oil prices.  Consumer prices will grow more slowly in 2019 before returning to our 2% target by year end.”  

With economic growth registering 1.57% in the fourth and headline inflation at 1.9% and core at 1.6%, there is no economic case for tighter monetary policy.

If the bank’s projections dip below the current levels, the odds of a rate cut later in the year will rise.

Dollar/Canada

The Canadian Dollar dropped sharply against the US Dollar in the fourth quarter. The loonie fell from 1.2810 in early October to 1.3577 on January 2^nd.  One factor was increasing market skepticism that the Bank of Canada would be able to maintain its rate direction in the face of the impact of falling crude prices on the Canadian economy, another was the Fed policy that led to one final hike in December to 2.5%.

Reuters

The price of West Texas Intermediate (WTI) crude oil fell from over $75 in early October to below $45 by late December.

The increasing dovishness of the US Fed after the December increase and the subsequent return of WTI to just $65 have sponsored only a modest recovery in the loonie to 1.3430 (4/23).  

Despite the official retention of a tightening bias in the Bank of Canada’s rate policy in the reference to “the timing of future rate increases” it was never a strong possibility that the bank would continue hiking once the Fed had stopped. 

The Fed and the Bank of Canada have been effectively on hold since the change in the Fed’s rhetoric in January. Wednesday’s announcement will make it Bank of Canada policy.

The Canadian Dollar has been nicknamed the loonie for the picture of the picture the loon, a common North American bird, on one side of the Canadian Dollar coin.  In 2006 the Royal Canadian Mint obtained the rights to the name.