BoC More Dovish but Still Out of Step As it Holds Rates

Stockholm (Ekonamik) – The Bank of Canada (BoC) held its policy rate at 1.75%, at its monetary policy meeting this week. “We now expect that economic growth will ease over the summer and will average around potential output growth over the second and third quarters,” said Carolyn Wilkins, Senior Deputy Governor of the BoC, at the monetary policy report press conference opening statement.  “At the same time, inflation remains around 2 percent. The fact that Canada is picking up while the US economy is slowing sounds like a divergence. In fact, it’s a process of convergence. This is because the two countries are at different points in the economic cycle. The United States is slowing to a more sustainable pace, while Canada is moving back up to its trend growth.”

The decision was described as “fully expected” by Benjamin Reitzes, Director of Canadian Rates & Macro Strategist at BMO Capital Markets. For the Canadian economist, the main takeaway from the BoC’s statement was that “the BoC sounded a bit more dovish”, he said. “It’s clear that the trade backdrop is a significant concern for the BoC and is the single largest downside risk…that’s hard to argue with,” the BMO director noted, echoing remarks from Wilkins that “at the global level, escalating trade conflicts and geopolitical tensions have been taking even more of a toll on trade and business investment than we expected.”

However, according to the BMO strategist, “despite the downgrade to the outlook, it’s going to take a deeper deterioration to spark conversations about easing even as the Fed seems poised to lower rates at month-end.While the bar to move rates remains quite high, there’s clearly more caution than in the prior statement from late May. The policy statement was littered with references to trade tensions (five separate mentions for those counting).” As Eric Lescelles, Chief Economist at RBC Capital Markets, noted on his preview of the BoC meeting, “on the one hand, nearly every other major developed-world central bank has pivoted toward rate cuts. To be caught out of step could prove problematic, as demonstrated by a Canadian dollar that has appreciated notably in recent weeks. Worldwide considerations such as softening global demand and rising protectionism are no less relevant to Canada than to other nations.”

Video from BoC

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