The Bank Of Canada Acknowledges Risks Worsen Yet Chooses Not To Cut Rates

In a rather short policy statement, the Bank of Canada (BoC) freely acknowledges that the global economy is in trouble, yet it sees no urgency in any acting now in advance. As expected, the BoC announced it would keep its the policy rate at 1 ¾%, yet it cites that:

“Ongoing trade conflicts and uncertainty are restraining business investment, trade, and global growth. A growing number of countries have responded with monetary and other policy measures to support their economies. Still, global growth is expected to slow to around 3 percent this year before edging up over the next two years. Canada has not been immune to these developments. Commodity prices have fallen amid concerns about global demand”

Interestingly, the BoC acknowledges that it is not been swayed by rate cuts in any of trading partners, particularly the US and the EU, both of whom have taken aggressive measures to stimulate their respective economies. Also, the BoC recognizes that Canada, as a small nation, heavily dependent on international trade, cannot escape the consequences of falling demand for commodities and manufactured products.

Turning to the domestic side, the BoC forecasts a much slower second half of the year (which is nearing its end). Contributing to this slowdown are the well-known problems in the oil sector, the overall decline in business investment and the weakness in exports, especially to Asia. Elsewhere the results are a mixed bag of mediocre consumer spending and steady housing activity. Neither of which are able to adequately offside the slump in business capital investment. On the inflation front, again the BoC acknowledges that, although the CPI is running at the target rate of 2%, it is expected to dip below that number in 2020.

So, global growth is slowing, inflation is not on the horizon, other nations are cutting rates to support their economies and the BoC sees no reason to cut rates now in anticipation of very weak growth in 2020 and beyond. Given that a rate cut now will not likely impact the economy for another 6-9 months, due to normal lags, the BoC decision to hold the line is even more questionable. In a rather odd concluding statement, the BoC “is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist “and it “will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment”. The decision to hold the line on any rate cuts is even more puzzling given that the risks to the downside. In the press conference, Governor Poloz acknowledged that in July the downsize risks were more hypothetical since the US-China trade war had not as yet taken real substance. But today the existence of tariffs and other protective measures makes the downside risk a reality.

 How much more evidence does the BoC need to be convinced that now is the time to act?