Canada may have entered a recession in the first half of the year but our central bank is awaiting more proof of a downturn, opting to leave the national cost of borrowing at 0.5 per cent in today’s announcement.
The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
A Vote of Confidence
Lack of movement indicates the Bank of Canada has confidence in the economy’s ability to weather recent stock market volatility and a faltering oil industry, bolstered by an encouraging uptick in June GDP and strengthening export numbers. Both economic reports, released at the end of August, may have bought the Bank more time before altering monetary policy.
“Increasing uncertainty about growth prospects for China and other emerging-market economies, in contrast, is raising questions about the pace of the global recovery,” the Bank stated in their announcement.
“This has contributed to heightened financial market volatility and lower commodity prices. Movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy. While the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are regaining momentum.”
A Rate Cut Still Not Off the Table
Despite this positive data, a Reuters poll called for a one-in-four chance of a September rate cut. It would have marked the third time this year rates were lowered, and would have left the cost of borrowing at 0.25 per cent – a low not seen since the 2008 – 2009 recession.
Rates remained at 1 per cent between September 2010 to January 2015, when, in a move that caught lenders and economists off guard, the bank implemented a 0.25 per cent discount. A second cut was made in July, when oil prices failed to recover as forecasted. The downturn also prompted the Bank to revise GDP growth forecasts to 1 per cent from 1.9 in 2015, and to 2.5 per cent in 2016 and 2017 respectively.
Today, the Bank stated those previous rate cuts are taking the desired effect as the economy continues to be supported by real estate spending and a strengthening export industry, backed by improving conditions in the U.S.
“The dynamics of GDP growth in Canada outlined in July’s MPR also remain intact. The stimulative effects of previous monetary policy actions are working their way through the Canadian economy,” the Bank stated.
Awaiting a Longer-Term Outlook
Despite recent confirmation of a Canadian recession, experts say a fuller data picture is warranted before the Bank will make a move on monetary policy. While Q2 numbers hinted that the export industry may be benefiting from the low Loonie, third-quarter data will provide greater insight to whether the economy is truly back on track.
Stated Will Dunning, CAAMP Chief Economist and RateSupermarket.ca mortgage panelist, “The BoC will want to see more data before it concludes that further action is required (and to judge whether the stock market swoon will be lasting and will have material impacts).”
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Dunning added that the bank’s messaging will be especially scrutinized as the October federal election approaches. ” …while the BoC is definitely independent and apolitical, it will be reluctant to say anything that might influence the election.”
A Lower Loonie?
The Loonie dove to below 77 cents USD following the last rate cut and a strengthening U.S. greenback. While a double-edged sword for travelling consumers, a weaker Canadian dollar is credited with supporting the export industry, and was thought to be a motive for this month’s potential rate cut. However, the Bank may need not take further action at all against the Loonie, as the U.S. Federal Reserve may raise rates south of the border this month or next.
Said panelist Kelvin Mangaroo, “Anticipated rate liftoff action from the U.S. Fed could put further downward pressure on the Loonie. I expect the Bank of Canada will take a medium-term wait-and-see approach, and will review Q3 economic data before pulling the trigger on another rate cut.”