A steady economy is building the case for a BoC rate hold

by Ephraim Vecina23 Aug 2019

Sustained economic stability might be a precursor to a rate hold decision by the Bank of Canada next month.

Data from Statistics Canada indicated that July’s inflation was a higher-than-expected level of 2%, defying expert predictions of a small decline and remaining essentially static compared to the June reading.

Immediately prior to the release of the figures, traders were pegging a one-in-five chance for a rate cut in September, in response to anxiety surrounding the possibility of a global recession.

However, the StatsCan measure pointed to a stable, robustly performing economy. Thus, the chance of a downward adjustment in the BoC rate was revised to less than one in six, per Bloomberg’s latest polling of economists.

The central bank retained its interest rate at 1.75% for the sixth straight policy meeting in July.

Earlier this month, Deloitte chief economist Craig Alexander argued that the BoC is not pressured to follow the U.S. Fed’s lead when it comes to interest rates – especially since the two nations’ fundamentals are quite different.

In addition, Canada is not significantly burdened by economic factors such as the cross-Pacific trade war.

“The two central banks didn’t move in lockstep with rates going up, so they don’t need to move in lockstep with rates coming down,” Alexander said in an interview. “I don’t think the economic indicators, at this point, are flashing that a recession is upon us.”

“One could argue that the Fed went farther faster and now it’s going reverse some of that, so there isn’t the pressure on the Bank of Canada to respond.”

 

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