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Canada Monetary Policy October 2019

Canada: Bank of Canada leaves rates unchanged in October but takes a dovish turn

On 30 October, 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 under-control inflation levels, as inflation clocked in at 1.9% in both August and September. The BoC expects price pressures to soften in the short-term before averaging 2.0% in 2021. At the same time, the Bank continued to cite ongoing trade tensions and a softer global growth backdrop as key downside risks to the economy, specifically to business investment and exports. That said, a tight labor market, solid income growth and government spending should be supporting domestic demand.

Going forward, the Bank was noticeably more dovish and will be closely monitoring “the extent to which the global slowdown spreads beyond manufacturing and investment”. The BoC has been relying on strength in consumer spending and the real estate market to hold interest rates steady, which are now in line with their neighbors to the south following the Fed’s rate cut.

While key central banks around the world have been cutting rates, the Canadian dollar has continued to strengthen—despite subdued commodity prices. Although a strong currency should support household spending, it will also weigh heavily on export competitiveness. This, coupled with a gloomy global growth backdrop, will likely give the BoC enough reason to call for an insurance rate cut by the end of 2020. That said, the risk of inflation climbing above the 2.0% target rate and elevated household debt levels remain a key reason why the Central Bank’s monetary policy path has diverged from other major banks’ paths this year. The Bank will thus keep a close eye on both before cutting rates.

Commenting on October’s decision, Brian DePratto, director at TD Economics, noted:

“The Bank has maintained its optionality – the path to a rate cut is clear, and they’ve shared the map with markets, but they have not yet chosen to walk down it. Barring a marked improvement in the global backdrop, we expect Poloz to put on his walking shoes in early 2020.”

The next monetary policy meeting is scheduled for 4 December.

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