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Canada Monetary Policy December 2019

Canada: Bank of Canada leaves rates unchanged in December and rolls back dovish stance

On 4 December, the Bank of Canada (BoC) left its target for the overnight rate unchanged at 1.75%, as had been widely expected by market analysts.

The Bank’s decision to stand pat was driven by close-to-target inflation levels, with inflation clocking in at 1.9% for the third consecutive month in October. The BoC now expects price pressures to intensify slightly in the short-term—due to last year’s sharp fall in gasoline prices—before averaging 2.0% over the next couple of years. At the same time, the Bank continued to fret over ongoing trade protectionism, which remains the key downside risk to the economy, specifically with regards to business investment and exports. That said, the Bank highlighted monetary easing efforts by other key central banks over the past year should catalyze global growth, which the Bank projects will stabilize over the medium-term. Moreover, on the domestic front, solid income growth has underpinned private consumption, while low mortgage rates and strong population growth have been feeding into residential investment—boding well for economic growth.

In its communiqué, the Bank was noticeably less dovish, although did note that it will continue to measure “the adverse impact of trade conflicts against the sources of resilience in the Canadian economy”. Moreover, the Bank stated it will assess the fiscal stimulus package Prime Minister Justin Trudeau’s minority government is expected to push for next year, which will be unveiled in early December.

Looking ahead, near-target inflation and high household debt will likely give the Bank enough reason to hold steady for the majority of next year. That said, trade protectionism and a subdued global growth outlook will likely continue to hamper exports. Meanwhile, production cuts in Alberta’s oil sands are expected to remain in place until at least December 2020, which will likely weigh on the energy sector. Overall, the Bank is expected to deliver a rate cut by the end of next year in an attempt to counter disinflationary pressures and to support economic growth.

Commenting on December’s meeting, James Marple, a senior economist at TD economics, noted:

“The Bank of Canada will remain cautious to the financial stability risks of relying on household borrowing to support growth. Still, in a risk-filled outlook, with any signs of economic deterioration, it may yet choose to err on the side of supporting growth and relying on other tools to mitigate financial stability risks.”

The next monetary policy meeting is scheduled for 22 January.

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