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Bank of Canada to cut rates before the end of 2019: Capital Economics

Bank of Canada Governor Stephen Poloz speaks during a business luncheon in Montreal, Thursday, February 21, 2019. (THE CANADIAN PRESS/Graham Hughes)
Bank of Canada Governor Stephen Poloz speaks during a business luncheon in Montreal, Thursday, February 21, 2019. (THE CANADIAN PRESS/Graham Hughes)

The Bank of Canada will cut its key lending rate in December as a weakening housing market and oil sector headwinds drag GDP growth back below potential in the second half of the year, predicts Capital Economics.

The London-based research consultancy notes the recent tone from senior officials signals the bank is set to sideline plans to raise the trend-setting rate to its neutral range, between 2.5 and 3.5 per cent.

The bank has left rates unchanged at 1.75 per cent since last October, following five increases since mid-2017.

In a speech last week, Governor Stephen Poloz said the path towards the target range is “highly uncertain” amid sluggish business investment and a cooling housing market.


Capital Economics senior Canada economist Stephen Brown notes recent speeches by Senior Deputy Governor Carolyn Wilkins and Deputy Governor Timothy Lane did not mention the prospect of further interest rate hikes.

“It’s not hard to see why officials are concerned,” Brown wrote in a research note. “The
available data suggest that GDP fell for the second month running in December, by 0.1 per cent. Worse still, that weakness appears to have been broad-based.”

Brown points to declining oil and gas rig activity driven by lower commodity prices, falling housing starts and home sales, and the largest monthly fall in manufacturing GDP in two years. The only positives appear to be rising retail and wholesale GDP, he said.

Brown expects the bank will continue to reiterate that further interest rate hikes are needed, even if the case for pressing ahead becomes tough to support.

“While the Fed dropped any suggestion of further rate hikes from its policy statement in January, there’s little to suggest that the Bank of Canada will follow suit next week,” he wrote.

“The qualifier that the bank added in its last policy statement, that further rate hikes would be needed ‘over time,’ provides a fair amount of ambiguity over when the bank might actually raise rates again.”

The Bank of Canada’s core inflation measures were unchanged in January at 1.9 percent. The reading omits volatile items like gas prices and airfares. CIBC World Markets senior economist Royce Mendes expected that figure would tick down to 1.8 per cent.

“That’s still within striking distance of the [bank’s] two per cent target, but combined with soft wage readings, it’s hardly a reflection of the sort of high pressure economy Janet Yellen described would be optimal to assure central bankers weren’t tightening conditions prematurely,” he wrote in a recent research note.

Both Mendes and Brown expect the Bank of Canada to lower its neutral rate estimate in its next annual review, set to be published in April.

“That won’t necessarily mean that Governor Poloz is done hiking, just that he’s finally slowing down to a more appropriate speed,” Mendes wrote.

The bank’s next rate decision is scheduled for March 6. Brown is calling for rates to be cut to 1.50 per cent at the Dec. 4 meeting.

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