Bank of Canada Expected to Hold Steady on Rates

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12/03/2019 | 03:14 pm


By Paul Vieira



OTTAWA -- Canadian market watchers expect the Bank of Canada to leave its main interest rate unchanged in its decision on Wednesday but are sharply divided on whether a rate cut is coming in early 2020.



Economists from 10 of the 11 primary dealers of Canadian government securities that participated in a survey by The Wall Street Journal predicted the Bank of Canada will keep its benchmark overnight interest rate at 1.75%. The central bank's main interest rate has been at this level since October of last year.



What the economists don't agree on is whether a rate cut in early 2020 is in the offing. Half the economists said they expect the Bank of Canada to cut rates in the first quarter, perhaps as early as January. The other half said they expect Canada's central bank to be on hold through next year.



The Bank of Canada has yet to follow in the footsteps of its developed-world peers -- such as the Federal Reserve, the European Central Bank and the Reserve Bank of Australia -- in cutting rates to mitigate the damage from slowing economic growth. Last month, Bank of Canada Gov. Stephen Poloz said he believed monetary conditions were about right, given current conditions.



"We are close to the tipping point for the Bank of Canada," said Andrew Kelvin, chief Canada strategist at TD Securities. He said he is projecting a Canada rate cut in January. He added that any further downgrades to the global economic outlook could push Canadian output next year below the economy's projected potential growth of 1.7% -- or the speed at which gross domestic product can grow without triggering inflationary pressure.



Global growth is set to slow to 2.9% this year, according to the Organization for Economic Cooperation and Development, and remain stuck at roughly 3% over the next two years. The Bank of Canada forecasts 1.5% growth this year, and a sub-2% expansion in 2020 and 2021.



The biggest overhang on the Canadian economy is the impact from the global trade conflict, highlighted by U.S.-China tensions. The U.S. and China are in talks on a possible first-phase trade pact, working toward a Dec. 15 deadline. President Trump on Monday was noncommittal about an agreement. Failure to reach a deal could prompt additional U.S. tariffs on Chinese imports.



Nevertheless, there is a contingent of economists who believe the Bank of Canada will remain on hold through 2020. "The bar for rate cut is still high. It appears to us only a gloomy recession will force the central bank to cut its policy rate," said Sebastien Lavoie, chief economist at Laurentian Bank Securities.



Data covering third-quarter output in Canada might persuade the Bank of Canada to hold steady on rates, some analysts say. Growth slowed as expected to 1.3% annualized, although there was a significant rebound in business investment and an improvement in domestic consumption. Further, Canadian income surged 5.1% and the household savings rate hit a four-year high, which could offer the economy support.



Economists who contend no immediate change in Canadian interest rates is imminent point to annual inflation that is close to 2%, or the Bank of Canada's target, and fears that further monetary stimulus could create overheated conditions in Canada's real-estate market.



Write to Paul Vieira at paul.vieira@wsj.com





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