View Change April 05, 2019 / 06:09 pm UTC

No Bank of Canada Tightening Until 2020

By David Sloan

View change: While the Canadian economy seems likely to meet downgraded Bank of Canada (BoC) expectations in Q1 and going forward, recent comments from Governor Stephen Poloz suggest a further downgrading of a previous tightening bias. We now expect no move in rates this year. We still expect that the next move will be higher, but not until 2020.

Figure 1: Forecast Change (%)

Q3 2019Q4 2019Q2 2020Q4 2020
Previous Forecast1.752.002.252.25
New Forecast1.751.752.002.00

Source: Continuum Economics

After a Weak Q4, the Economy Appears to Be Meeting Modest Expectations….

After a weak Q4 GDP, the BoC delivered a clearly dovish shift in its March 6 statement, ceasing to look for rates to rise to neutral. However, that the BoC noted “increased uncertainty over the timing of future rate increases” still implied that the next move was expected to be a hike.

Since the statement, January GDP saw a stronger-than-expected 0.3% increase, implying that the BoC’s 0.8% annualized Q1 GDP forecast could be modestly exceeded. Employment slipped in March but after two strong months, trend remains positive. Wage growth has even picked up a little, though remains subdued at 2.3% y/y. Core inflation is slightly below the 2% target. We expect respectable GDP growth to resume in Q2, with the recent budget providing a marginal fiscal boost. 

…but the Bank of Canada Seems to Have Moved Away From a Tightening Bias

However, Poloz recently stated that it is not helpful to focus on the neutral rate, which is not a target. This implies a further downgrading of the bias to move rates higher, with tightening likely to require a spell of above-potential growth to close the output gap again after a recent widening, returning inflation to target. Even with a return to respectable growth, we expect the output gap will persist through 2019. Continued solid growth in 2020 will likely be enough to push rates a little higher, however, by 25 bps in Q2, to 2.00%.

Risks to the View

The BoC is data dependent, and a faster-than-expected closing of the output gap could bring tightening forward, while lack of progress could mean no tightening at all. Escalation of trade tensions with the U.S., or a renewed slide in the oil price, could shift the bias toward easing. 

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Analyst Certification
I, David Sloan, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.