Why Canada differs on rate direction - again

Are we playing it safe with interest rates or will we need to play catch-up with other world economies?

Andrew Willis 1 November, 2019 | 1:22AM
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Andrew Willis: The U.S. and Canada went their separate ways on interest rate policy yet again, with the Bank of Canada keeping it’s target overnight interest rate at 1.75 per cent, while the U.S. Federal Reserve opted for their third cut of the year down to as low as 1.5 per cent.

Both moves were largely expected – but Canada is headed in a similar uncertain economic direction as other developed markets, and that has economists wondering what it’s going to take to get a trim to interest rates. 

Anne Mathias, Global Head of Interest Rates and Foreign Currency for Vanguard, predicted a steady rate for Canada and one last rate cut in the U.S.

Mathias says that the cut in the States was really just one last insurance cut – and that any more cuts would see them entering an easing cycle, something she doesn’t see happening too soon. She says the main motive behind the cut is the ongoing global economic uncertainty.

It’s that same economic uncertainty that will put pressure on the Bank of Canada to fall in line with the rest of world and cut rates.

But Mathias says that Canada has one of the more hawkish central banks in the G20, and that there would need to be some significant deterioration to see us actually follow suit and cut rates. For one, she says, unlike the U.S., our Central bank doesn’t put much weight on employment numbers. 

Canada’s more concerned with trade uncertainty and a weak business investment backdrop, BMO Chief Economist Douglas Porter said in a note, noting that Central Bank Governor Stephen Poloz also isn’t a fan of forward looking statements.

But the Bank did put out a prediction on GDP growth for next year – and it isn’t the brightest, cutting the forecast from 1.9% to 1.7%. As Porter puts it “it’s patently obvious there are serious downside risks to a call of ‘no change’ by the Bank over the next year.”

After a robust Q2 of this year and a delicate, yet steady housing market keeping us safe for now – the sentiment out there is ‘something’s gotta give’.

For Morningstar, I’m Andrew Willis.  

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About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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