Posted Tuesday July 9, 2019

Bank of Canada Commentary

As domestic economy rebounds from soft patch, global challenges intensify

Thinks the market is priced for the Bank's next move to be a rate cut

HSBC Global Research expects the Bank of Canada to remain on hold, keeping its policy rate at 1.75% on 10 July. HSBC Global Research anticipate the Governing Council will maintain a neutral stance and again conclude that the current degree of accommodation remains appropriate.

While there is a risk that the Bank could adopt a more dovish stance amidst heightened global economic uncertainty, HSBC Global Research would consider such a move premature. Instead, HSBC Global Research see reasons for the Bank to leave open the option that the next move might be a hike.

Recent domestic news has supported the Bank's view that an economic soft patch around the turn of the year would prove temporary. Governor Poloz has said that if the Bank's forecast comes to pass, that "the natural tendency is for interest rates to still go up a bit". Such an outcome cannot be dismissed. The Norges Bank and Sweden's Riksbank have also recently indicated that their next moves are likely to be rate hikes.

That said, there are some blemishes on the domestic recovery narrative. As well, the global economic outlook is becoming murkier and uncertainty is likely to persist despite the US and China resuming trade talks. Many central banks have shifted toward dovish policy stances, or lowered policy rates. HSBC now expects the Federal Reserve and the ECB to lower their policy rates in September and December. Meanwhile, in Australia, the RBA has already cut by a total of 50 basis points, lowering its cash rate to 1.0%.

These developments suggest the BoC should take a cautious stance, despite the improved domestic economic data. Overall, HSBC Global Research sees the Bank remaining in "wait and see" mode, while acknowledging the heightened downside risk from increased global economic uncertainty. HSBC thinks it would be premature for the Bank to adopt a more dovish stance, or hint at possible rate cuts. That said, HSBC Global Research thinks the market is priced for the Bank's next move to be a rate cut, though the timing of such a move has recently been pushed further into the future. HSBC Global Research believe the Bank will remain on hold before cutting its policy rate in the second half of 2020. is distributed twice weekly; Tuesday and Thursday

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ISSN 0824-45
Copyright, 2019

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