The Bank of Canada opted to hold rates steady to assess the fallout from the trade conflict with the US. Furthermore, the Bank offered little forward rate guidance, opting to maintain maximum flexibility in an uncertain environment.
The Bank provided some insights into how the trade conflict could impact the Canadian economy.
Interesting Observations.
- Business confidence and investment intentions have fallen
- The Bank must consider the impact of slower growth pushing inflation lower, while tariffs push inflation higher
- There was little discussion about whether inflation could be persistent
- The optimistic scenario is that growth briefly slows and then picks up (presumably because the trade war diminishes), while the pessimistic scenario is that growth craters and Canada enters a recession
Our Thoughts.
- Despite offering no forward guidance, the lack of concern over higher prices suggests that the Bank is more concerned about economic weakness
- Today’s action does not mean the rate-cutting cycle has ended. We expect the Bank to cut rates to at least 2.25% this year
The Market reaction.
- Yields are broadly unchanged
- The bond market continues to expect two more 25bps cuts this year
