Bank of Canada interest rate forecast report

BoC to hold interest rate at 1.75% on December 4

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Key findings

  • 100% of economists forecast a rate hold on December 4
  • Four economists think the Bank should cut the rate, and seven think a cut is on the cards for January
  • Economists discuss the impact of political uncertainty on economic growth
  • The panel weighs in on post-election fiscal policy

Expert forecasts ahead of the December 4 decision

Brian DePratto panelist
Senior Economist
TD Economics
Brian DePratto

HOLD

“The Bank of Canada is watching closely for signs that global uncertainty is bleeding into the Canadian economy more broadly, particularly consumer spending and housing markets. So far, we’ve seen little change in the trends in these sectors, suggesting that the Bank will be happy to stand pat in December.”
Carl Gomez panelist
SVP Research & Strategy
QuadReal Property Group
Carl Gomez

HOLD

“After the Bank of Canada left its policy rate unchanged for the eighth straight meeting in October, there was a sense that it was closer to a rate cut than it had been previously but they still haven’t opened that door entirely, especially as post-election federal fiscal policy appears poised to become more stimulative.”
Hubert Marleau panelist
Chairman
Palos Capital
Hubert Marleau

HOLD

“Three reasons: Inflation rate on target, the economy is operating at full employment, the Canadian dollar is stable.”

Professor
Concordia University
Moshe Lander

HOLD

“The Canadian economy continues to show signs of stress, but with so little room for interest rate cuts, the economy is not stressed enough to warrant using one of those cuts at this time.”
Lars Osberg panelist
Professor of Economics
Dalhousie University
Lars Osberg

HOLD

“Over estimates of underlying growth.”
Associate Director, Economic Forecasting
Conference Board of Canada
Alicia Macdonald

HOLD

“With inflation at target and recent indicators pointing to continued economic growth in the third quarter, we expect the Bank of Canada stay on hold into 2020 as it weighs the extent of the impact of the global economic slowdown against the risk of stoking household financial vulnerabilities from any easing of its current policy stance.”
Senior Economist
RBC
Josh Nye

HOLD

“We have the BoC on hold in December. We think this week’s Q3 GDP report will show a 1.5% annualized increase, which would be a touch stronger than the BoC’s 1.3% forecast. With growth likely driven by consumer spending and housing activity, we think the BoC will see enough evidence of resilience on the household side to opt against lowering rates. That said, business investment and trade are likely to be soft, and a continuation of those trends toward the end of the year would test the BoC’s patience. Our forecast assumes a rate cut early next year.”
Brett House panelist
Deputy Chief Economist
Scotiabank
Brett House

HOLD

“After turning incrementally more dovish on 30 October in the Bank of Canada’s rate decision and surrounding communications, on 21 November Gov. Poloz provided fairly explicit forward guidance–despite his general aversion to prejudging outcomes–that the December meeting would see the Bank keep rates on unchanged. Amongst a variety of statements that implied a cut in December would represent a massive communications flip-flop, Gov. Poloz most importantly noted that, “We think we have monetary policy conditions about right.” As a result, we have pushed our forecast of cuts into Q1 and Q2 2020.”
Sebastien Lavoie panelist
Chief Economist
Laurentian Bank Securities
Sebastien Lavoie

HOLD

“The decline in global manufacturing activity triggered by trade tensions has shown signs of bottoming. Domestically, CPI inflation remains sticky and close to the BoC target, wage growth is rock-solid and housing activity strengthens. The BoC could acknowledge the impact of the current labour market tensions in the rail industry in its statement, but there is not much that can be done beside monitoring potential disruptive impacts.”
Stephen Brown panelist
Senior Canada Economist
Capital Economics
Stephen Brown

HOLD

“Due to gathering momentum in the housing market, we don’t think the Bank will be prepared to cut interest rates.”
Murshed Chowdhury panelist
Associate Professor
University of New Brunswick
Murshed Chowdhury

HOLD

“As the world economy dodges recession by a narrow margin and the domestic economic activity remains modest, the Bank is likely to hold the rate again.”
Angelo Melino panelist
Professor
University of Toronto
Angelo Melino

HOLD

“Not enough has happened since the last decision (and Monetary Policy Report publication) to justify a rate change.”
Hubert Marleau panelist
President
Econometric Research
Atif Kubursi

HOLD

“It is quite likely that BOC will hold the line on interest rate cuts, although the economic scene calls for an aggressive stance to forestall an impending recession. Retail sales are down and real estate markets are sluggish and uncertainties about the future of the economy are mounting.”

The December 4 decision

The Bank of Canada is set to hold the interest rate on December 4, 2019, according to 100% of the economists on Finder’s panel. However, a rate change could be on the cards for early 2020, with 58% (7 of 12) of the panellists expecting a cut on January 22, 2019.

Deputy Chief Economist at Scotiabank, Brett House, noted a recent statement by Governor Poloz as the reason for his hold forecast:

… Amongst a variety of statements that implied a cut in December would represent a massive communications flip-flop, Gov. Poloz most importantly noted that, ‘We think we have monetary policy conditions about right.’ As a result, we have pushed our forecast of cuts into Q1 and Q2 2020.

SVP of Research and Strategy at QuadReal Property Group, Carl Gomez, commented:

“After the Bank of Canada left its policy rate unchanged for the eighth straight meeting in October, there was a sense that it was closer to a rate cut than it had been previously but they still haven’t opened that door entirely, especially as post-election federal fiscal policy appears poised to become more stimulative.”

Professor of Economics at Concordia University, Moshe Lander, thinks economic conditions aren’t bad enough to warrant a change.

“The Canadian economy continues to show signs of stress, but with so little room for interest rate cuts, the economy is not stressed enough to warrant using one of those cuts at this time,” he says.

Despite all economists forecasting a rate hold, four economists think the Bank should cut the interest rate: Deputy Chief Economist at Scotiabank, Brett House; Senior Economist at TD Bank, Brian DePratto; Professor at Dalhousie University, Lars Osberg; and Professor at McMaster University, Atif Kubursi.

House thinks there would be utility in an insurance cut.

“The last rate decision was a dovish hold with a note that ‘the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist.’ While the prospects of a US-China deal may have improved, it remains some distance from being concluded. At the same time, high-frequency data imply that Q2’s strength was transitory, Q3 was materially weaker, and the hand-off to Q4 was soft.

“Although inflation remains on target, given the lag in the impact of monetary policy changes and the uncertainties around trade and other policies that remain, there would be utility in an ‘insurance’ cut that would give Canada additional breathing room to adjust to both domestic and external weaknesses in the real economy,” he said.

Kubursi commented, “… there are mounting signs that the expected slow down is happening and the BOC has little choice but to take preemptive measures before the contractions gain steam.”

Post-election fiscal policy

With the election over, we asked our panellists what they see ahead for fiscal policy post-election. Both Gomez and Lavoie noted the government has indicated it would take a more stimulative approach while House and Lander said social programs will see a boost.

“The incoming government has indicated a mildly stimulative tilt to federal fiscal policy,” Gomez said.

Lavoie commented, “The risk of a partial implementation of fiscal stimulative measures announced during the federal election campaign would be a net positive for the outlook. Since a stronger fiscal tailwind is not on the BoC MPR scenario, this would turn out to be another factor supportive of our call that the BoC will leave unchanged the 1.75% overnight rate target through 2020.”

House said post-election fiscal policy will see a focus on pharmacare and childcare, “We anticipate a mild expansion of the deficit on the order of 0.3 to 0.5 ppts of GDP, with a focus on pharmacare and childcare,” he said.

Professor Moshe Lander from Concordia University agreed but also said the situation could cause some friction.

“A mess. The Liberals will be forced to the left if they want the support of the NDP and Bloc to keep the government afloat. More spending on social programmes, more spending on the environment, more spending on low-income households means more deficit and more conflict with the prairie provinces,” Lander said.

Six-month economic outlook


We asked our panellists about their six-month economic outlook for wage growth, employment, cost of living, household debt and housing affordability.

Half of the panel hold a negative outlook for both housing affordability and household debt, while 42% are neutral and 8% hold a positive forecast. Economists are most optimistic for wage growth, with 67% giving a positive outlook.

Political uncertainties and economic growth

We also asked the economists how much they think political uncertainties – such as the looming threat of a US-China trade war or unresolved Brexit negotiations – are affecting economic growth.

Chief Economist at Laurentian Bank, Sebastien Lavoie, noted uncertainty is at an all-time high.

“The global policy uncertainty index remains at an all-time high and is expected to stay high through 2020,” he says.

Senior Economist at TD Bank, Brian DePratto, mentions that the Bank estimates this uncertainty has shaved about 1 percentage point from economic output.

“There is no question that uncertainty is holding back activity, particularly in non-residential investment and exports. The Bank of Canada’s estimates that this has already shaved about a point from economic output are a reasonable assessment of this impact,” DePratto says.

Other forecasts were more conservative. For example, House says modelling by Scotiabank suggests economic growth has only been impacted by about 0.3 percentage points.

Associate Director, Economic Forecasting at the Conference Board of Canada, Alicia MacDonald, says Canada is experiencing poor levels of business investment amidst global political uncertainty.

“Political uncertainties are weighing on economic growth around the world. The U.S. economy is slowing sharply under the weight of that uncertainty and here in Canada, we continue to see poor levels of business investment as firms are uncertain about what the trade dispute will mean for global growth prospects and future trading relationships,” she commented.

History of the overnight rate

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