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Bank of Canada on Hiatus Before Election: Decision Day Guide

May 28, 2019 by Theophilos Argitis and Erik Hertzberg

Bank of Canada Governor Stephen Poloz will probably keep interest rates unchanged Wednesday in what looks to be a prolonged hiatus, at least until after elections in October.

All 25 analysts surveyed by Bloomberg see policy makers leaving the benchmark overnight rate at 1.75% in a decision at 10 a.m. in Ottawa. That would mark a fifth straight hold by the central bank since it last raised borrowing costs in October. Longer-term, most analysts predict rates won’t rise again until next year at the earliest.

It’s a reflection of an economy, only just emerging from a serious slowdown, that’s still too fragile to cope with higher rates. Businesses are spooked by global trade uncertainty. Low oil prices and transportation constraints have hobbled the crucial energy sector. Record debt levels are a dead weight on consumer spending. Policy makers don’t even know for sure how past rate increases — five since mid-2017 — are affecting households.

Investors, more pessimistic than analysts, are betting on cuts rather than hikes. They see an 80% chance of one rate cut over the next 12 months. In the U.S., conviction on lower rates is even stronger, with at least two rate cuts priced in over that period.

Still, the Bank of Canada has shown no inclination to loosen policy. For one, officials are wary of encouraging more borrowing in an economy already saddled with debt. Underlying price pressures, meanwhile, have been hovering around the 2% target for more than a year. As recently as last week, Poloz continued to argue for the long-term need for higher rates.

There are also federal elections. While the central bank in the past has adjusted rates in the months leading up to a general vote, policy makers would need to consider the political optics of any move — either up or down. That raises the bar for any change.

The most likely reason for the Bank of Canada to be pulled off the sidelines before the October election would be an adverse global economic or financial event. This could take the form of an escalating trade war between the U.S. and China, a correction in global financial markets, a cut in rates by the Federal Reserve — or a combination of these.

Outside of global developments, there aren’t any obvious made-in-Canada triggers for Poloz to move in the next six months.

The central bank has already cut its first-half growth forecast to below what most analysts expect. That means policy makers are unlikely to be disappointed enough by the data to contemplate a cut.

Recent economic numbers on employment, housing and manufacturing have actually surprised to the upside — but no one believes a better-than-expected performance in the first six months of this year will be enough to prompt the Bank of Canada to seriously consider a hike.

The Bank of Canada is more optimistic about the economy in the second half and into 2020, when it expects growth to sustainably return to more normal levels of about 2%. If that scenario plays out, then rate hikes are possible. If the numbers disappoint, cuts could be on the table.

“The battleground is going to be the third quarter,” said Mark Chandler, head of fixed income research at Royal Bank of Canada. The “earliest that you can expect something from the bank — I think it’s also on the down rather than the up — would be” at the Oct. 30 rate decision.

The full picture for that quarter however won’t appear until output data are released at the end of November. Fourth quarter data won’t be available until February 2020.

The Bank of Canada has rate decisions scheduled on July 10, Sept. 4, Oct. 30 and Dec. 4.

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