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Almost no chance of an interest rate hike, maybe even a cut in 2019

Federal Reserve Chairman Jerome Powell and Bank of Canada Governor Stephen Poloz attended the International Monetary and Financial Committee (IMFC) conference during the World Bank/IMF Spring Meetings, in Washington, Saturday, April 21, 2018. Rate hikes seemed much more certain then. (AP Photo/Jose Luis Magana)

The Bank of Canada faces its first tough decision of 2019 on Wednesday — what to do about interest rates.

Not long ago central bankers were talking about an economy on fire, in need of higher rates to cool down growth.

The Bank of Canada has hiked its benchmark rate five times since 2017, most recently in October by a quarter-point to 1.75 per cent.

That was before talk of a slowing global economy, stocks in bear market territory, and collapsing oil prices. Sure the gap between WCS and WTI (CL=F) has narrowed to a nearly two-year low, but it took an Alberta government mandated production cut.

The Bank of Canada is widely expected to leave rates unchanged. But despite a desire to hike to a neutral range between 2.5 percent and 3.5 per cent, Governor Stephen Poloz has signaled he’s willing to roll with the punches.

“We expect the BoC to hold at this meeting, but to provide some indication that it remains on track for further hikes later this year dependent on what we expect to be still-solid data,” Brett House, deputy chief economist at Scotiabank, told Yahoo Finance Canada.

Interest rate cut on the horizon?

Capital Economics’ Stephen Brown expects rates to remain unchanged tomorrow, but will be paying close attention to the language.

“The key thing to look out for is whether officials still judge that the policy rate will need to be raised further in this cycle to keep inflation in line with the target in the medium term,” Brown told Yahoo Finance Canada.

Brown says that could surprise markets, which are not pricing in any more rate hikes in 2019. He expects Poloz will say further rate hikes are possible.

“By contrast, our forecasts envisage GDP growth slowing further due to trouble in the energy sector and a slowdown in the housing market.” says Brown.

“If we’re right, then further rate hikes are unlikely. In fact, we expect the Bank to cut rates at the end of 2019.”

Almost no chance of another hike

Cambridge Global Payments director Karl Schamotta doesn’t consider an interest rate cut likely.

“Canadian policy remains very accommodative and conditions have not deteriorated to a degree that would justify the sort of ‘emergency stimulus’ that was applied a few years ago,” Schamotta told Yahoo Finance Canada.

But Schamotta says Canada is flirting with a slowdown.

“The domestic economy continues to run very close to its natural limits, but the housing market looks set to lose more momentum this year, and household balance sheets remain spectacularly overleveraged,” says Schamotta.

“This also comes as softening commodity prices, rising market volatility and dropping global manufacturing indices suggest that external conditions are worsening.”

While the market isn’t pricing in another rate hike by the end of the year, Schamotta thinks the odds are lower than a coin toss.

The loonie’s flight path

Those low oil prices have grounded the loonie (CADUSD=X) over the past few months.

Currency traders will be paying close attention to Poloz’s tone. They expect a decidedly dovish tone. Any hint of more hikes could put traders in a buying mood and push the Canadian dollar higher.

“Any sign of optimism could trigger the classic sell-on-rumour, buy-on-news reaction in the Canadian dollar,” says Schamotta.

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