The Bank of Canada will kick off the new month with its monetary policy meeting today, and investors remain somewhat divided on the outcome.
The BoC will be holding rates steady at today’s meeting. But the central bank is still not out of the woods as the global economic uncertainty remains bleak.
Given the world economic outlook, there is a growing consensus that the central bank should cut rates at least once this year. This falls in line with the BoC’s playbook. The central bank is often seen to make “insurance cuts” ahead of time.
The central bank follows a similar view on hiking interest rates as well.
The BoC has been one of the few central banks among major economies to remain neutral for the most part. This comes amid other big central banks such as the Fed and the ECB moving into an easing cycle.
The Bank of Canada started its rate hike cycle in July 2017, when it raised rates by a quarter basis point to 0.75%. Since then, the rate hike cycle saw the BoC hiking rates steadily to bring it to the current 1.75%.
Interest rates in Canada have remained steady since October last year. After bringing rates to the current 1.75%, the central bank has remained on the sidelines for nearly nine months so far.
Will the Central Bank Cut Rates this September?
For the September meeting, the general consensus among economists is that the BoC will hold rates steady. But looking ahead, the next policy move is almost certain to be a rate cut instead of a rate hike.
Canada’s domestic economy doesn’t warrant a rate cut at this point in time. But considering the global conditions, there is a good chance a rate cut could follow.
As of July, the economic indicators have been broadly in line with the BoC’s forecasts.
The central bank in the July meeting forecast that growth would average 1.3% this year while expecting Q2 growth to rise 2.3% on an annualized basis.
So far, data has consistently beaten the BoC’s forecasts. This gives the central bank a bit of room to wait and watch for further indicators to unfold. As a result, the BoC remains on firm footing compared to its peers.
GDP Rise Lowers Odds of Rate Cut This Month
On Friday, Canada’s latest GDP figures were released. In the second quarter, GDP rose 3.7%. The gains were mostly due to an increase in the export sector. This was the strongest quarterly gain since 2017. In the previous quarter, Canada’s GDP grew by 2.1%.
GDP is now outpacing that of the United States. Exports grew 3.7% during the quarter ending June 2019, while services exports rose 1.1%. However, business investment fell by 1.6% alongside consumer spending which was down 0.1% for the reported period.
The Bank of Canada was forecasting a growth rate of 2.3%. And the data beat estimates by a strong margin!
The gains in the GDP report now lowers the odds of a Bank of Canada rate cut. However, the timeline for a rate cut is still open for October. This largely comes due to the global headwinds. The Bank of Canada will also issue its forecasts for the economy.
In the previous forecasts, the BoC expected growth to slow into the next year. The odds for an October rate cut stand at 60%, compared to just 16% for a September rate cut.
Investors will be looking to today’s report specifically for the forward guidance. While the markets are currently anticipating a rate cut in October, there is a good chance that the central bank will like to extend this time frame a bit further beyond that.