Economists weigh in on Wednesday’s interest rate announcement

by Neil Sharma05 Jul 2019

Forget an interest rate hike.

Scarcely anyone believes the Bank of Canada will hike its interest rate on Wednesday and instead choose to hold it at 1.75%, but if it moves at all there will be a decrease, according to a growing chorus of economists.

“If we were only looking at domestic factors, we might think that the Bank would soon start to consider further rate hikes,” said Capital Economics’ Stephen Brown. “Economic growth is on track to outperform the Bank’s forecasts in the second quarter and core inflation has risen in recent months. But outside of Canada, trade tensions have grown, there are signs that U.S. GDP growth is slowing, and the Fed has signalled that it will soon cut rates. We suspect that the next move will be a cut.”

The housing market has made great strides so far in 2019, and because it plays a pivotal role in the Canadian economy, there aren’t many reasons to worry about the domestic economy. Still, global trade tensions are a spanner in the works.

“The Canadian economy has been performing in line with, if not ahead of, Bank of Canada expectations,” said TD Economics’ Brian DePratto. “Key housing markets are showing signs of recovery, and economic growth appears set to speed up notably in the second quarter. The external backdrop remains highly uncertain, which, balanced against domestic strength, suggests the current interest rate setting is about right.”

Moreover, renewed stability in the housing market isn’t something the Bank of Canada appears ready to unravel, making an interest rate decrease unlikely, according to QuadReal Property Group’s Carl Gomez.

“After a weak finish to 2018, the Canadian economy has seen better traction so far this year,” he said. “With stability returning to the housing market, the BoC will be careful about risking some of this stability with a rate cut even if the Fed opts to ease in July.”

Nevertheless, neither a rate hike nor decrease is likely Wednesday because of headwinds from abroad, according to the Conference Board of Canada.

“While some data suggests that the Canadian economy is indeed emerging from its recent slump, there remains a significant risk to the global economic outlook due to global trade tensions,” said Alicia Macdonald. “With a fair degree of slack in the domestic economy, the Bank of Canada can afford to be patient before moving interest rates.”

 

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