Today, the Bank of Canada kept its interest rates unchanged as expected. Avery Shenfeld, analysts at CIBC, points out that in the face of broad-based disappointments in recent economic growth both at home and abroad, the BoC had little choice but to water down its warnings of higher interest rates ahead.
“The central bankers only acknowledged that the “timing of future rate increases” was now increasingly uncertain and that it would “take time to gauge the persistence” of the slower pace to growth that has now been so evident in the data. A full waving of the white flag on its early hawkish view would have seen the Bank discuss the “timing and direction of future rate changes”, and Governor Poloz was at this point not willing to take that larger step.
“While the Bank of Canada was expecting only 0.8% Q1 growth in its last forecast, which looks reasonable, it might be reconsidering the pace at which growth accelerates in Q2, as it warned of a weaker first half forecast for 2019. That implies that this pause on rates will extend at least into mid-year, but doesn’t yet rule out a second half hike if we get a subsequent pick-up. For that, we’ll need to see the Bank of Canada also do an overdue rethink on how stimulative current rates really are.”
“Short term yields ticked down after the statement and the Canadian dollar weakened. But having fully priced out any chance of a rate hike, markets would have to start pricing in material odds of a rate cut this year rate to extend that move. We do think Q1 will be soft, but look for enough of a pick-up in Q2 to put upward pressure on short term yields from these levels.”