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  • KPB & Co Research

Today, the Bank of Canada kept interest rate on its key monetary policy tool - the over night rate at 1.75%. At the same time, the Bank rate was kept at 2.0%, and the deposit rate at 1.5%. The decision to keep policy rates unchanged came within the context of perceived stabilization of economic conditions in the first half of 2019, after the economy experienced a slowdown in the last half of 2018. The the Bank expects economic conditions will improve going into the last half of 2019. They also mentioned the following key data points as supportive of their decision:

  1. Recovery in the oil sector on the back of production increases, and oil price stability.
  2. More positive housing market data across national markets. The Bank did mention that some jurisdictions were still weak and continue to show flat to weak price growth.
  3. Strong job growth, which the Bank sees as a signal that businesses view recent weak economic data as temporary.
  4. Acceleration in the pace of consumer spending and exports in Q2, along with more stable growth in business investment.
  5. Moderate inflationary pressures. Accordingly, the Bank expects consumer price inflation and core inflation to remain at about 2 per cent the coming months.

Downside Risks to Watch Out For

With the Bank taking a more cautious tone and relying heavily on the data, there are a few data points that investors should watch out for. These data points may signal a change in how the Bank views the economy and policy rate path going forward. Key uncertainties around the Bank's forecasts came from:

  1. A sharp increase in inventory in Q1, which could lead to companies cutting back production in Q2 and Q3 to sell down excess products. This could potentially lead to a slowdown in growth.
  2. The escalation of trade conflicts is making businesses a bit anxious about future economic prospects. This may lead to a slowdown in business investment. The bank also noted that the trade restrictions introduced by "China are having direct effects on Canadian exports".

As the country prepares for upcoming elections, there are some who believe that the Bank's more cautious tone partly reflects the need to be supportive the fiscal policies of the liberals. A more accommodative policy stance will enable to the federal government to better roll out the housing affordability plan created during the 2019 Budget.

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