The Bank of Canada is out in the forefront when it comes to easing, having already cut in June and July. Economists are unanimous in their agreement that the BOC will cut again at the conclusion of its two day meeting on Wednesday. The economists are also expecting a particularly dovish statement as Canada faces a somewhat unique situation in its economy. , including the current Canada inflation rate.
Markets generally agree with the assessment of the economists, and are already looking for more easing later in the year. What that implies is that the surprise bit of hawkishness out of the BOC could significantly move the markets, but there isn’t much room for a dovish surprise.
In Spite of the Data
The expectations come after some otherwise strong data, such as GDP increasing faster than expected in the second quarter, and wages going up. But, a closer look showed that the increase wasn’t organic, and that the Canadian economy expanded mostly as the result of increased government spending.
The higher wages aren’t having as much of an impact on prices, due in part to the Canada inflation rate and Canadians saving at much higher rates than usual. Economists attribute this to stocking up ahead of housing renewals. With most Canadians on either variable rate mortgages or short-term fixed mortgages that become variable, the prospect of lower rates means that people will want to have money on hand to find new mortgages – or a new home.
Other Indicators In Line
As further evidence that the Canadian economy is growing on a technical basis as opposed to from increased activity, trade has slowed down. Exports have diminished, in part thanks to lower crude prices. But, also, slowing economic activity in the US has meant that Canada’s largest trade partner is buying less of key products, including automobiles.
Canada also has a relatively high unemployment rate at 6.4%, and the population has been growing faster than spending. In other words, on average, Canadian households are spending less, which provides a significant downward push for inflation. The hope for policymakers is that this decline in household spending (and subsequent weakness in the organic economy) has been driven primarily by high interest rates and inflation. With consumer prices declining, lower interest rates might be just what the doctor ordered to get the Canadian economy back on track.
More Cuts Coming
This is the thinking provided by the 70% of economists who believe the BOC will not only cut now, but go on to cut two more times afterwards. Some have said they would “not be surprised” if the BOC were to deliver a 50bps cut on Wednesday, though stopped short of outright predicting it.
Traders will be looking for confirmation of this outlook when Governor Tiff Macklem delivers his post-rate decision press conference. Potential upsets could be from a more hawkish tone, or putting emphasis on employment, where wages have been faster. The market might interpret that as saying the focus is more on inflation than growth, and reassess the rate cutting path.
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