This morning, the Bank of Canada did what many economists thought it would: nothing. As a result, the Bank’s overnight target rate will be maintained at 1.75%.  The benchmark has not changed since October 24, 2018 even though the US Fed Funds Rate declined three times in 2019.  

Parsing the Bank’s two most recent statements (today and December 4, 2019), we find several notable additional comments this time around:

• while “the Canadian economy has been resilient…data for Canada indicate growth in the near term will be weaker, and the output gap wider” than the Bank projected in October
• the Bank now estimates “growth of 0.3% in the fourth quarter of 2019 and 1.3% in the first quarter of 2020”
• exports “fell late in 2019 and business investment appears to have weakened after a strong third quarter”
• some of the “slowdown in growth in late 2019 was related to special factors that include strikes, poor weather and inventory adjustments”
• the “weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted”
• job creation, usually a positive note for the Canadian economy has “slowed and indicators of consumer confidence and spending have been unexpectedly soft”
• during the past year, “Canadians have been saving a larger share of their incomes, which could signal increased consumer caution”
• the Bank is “projecting a pickup in household spending, supported by population and income growth as well as by the recent federal income tax cut”

For all of 2020, the Bank expects real GDP in Canada to grow by 1.6% and 2% in 2021 but will be relying on expanded pipeline capacity to achieve this target. On a related note, the Bank believes the wider output gap in recent months will cause inflation to remain around 2%.

BoC’s next policy announcement is set for March 4, 2020 and in the ensuing period the Bank’s Governing Council “will be watching closely to see if the recent slowdown in growth is more persistent than forecast.” We will be watching closely as well.

Should you have any questions, please contact your First National advisor.

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