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BoC To Hold But Sound Dovish As GDP Growth Slows

Having held interest rates steady throughout 2019, the Bank of Canada is widely expected to continue standing pat at its first meeting in 2020.


A string of soft economic data toward the end of last year (GDP, labour market & retail sales) has left some to think that a rate cut isn’t completely out of the question, however, since the turn of the year things have improved slightly. Employment grew more than expected in December and we have got a string positive employment and business sentiment numbers in the past two weeks (such as the BoC’s Business Outlook Survey).


As a result, as I note in the Weekly E-Book, it is difficult to decipher the outlook for the Canadian economy right now. Governor Poloz’s latest comments suggest that his thinking is more along the lines of “things are unlikely to be as bad as they might seem”, and his neutral to optimistic tone has markets and analysts convinced that a rate cut won’t come in January.

However, despite his recent comments, some analysts are still looking for the BoC to adopt a more dovish tone at its meeting next week. This is because, when looking at the latest GDP figures, growth looks to have slowed significantly to an annualized rate of just 0.7% in Q4, well below the BoC’s already sub-trend 1.3% forecast.


Next week’s manufacturing and retail sales data, which are both expected to post increases for November, will provide further input to that GDP tracking call, but are unlikely to lift it back to the BoC’s 1.3% forecast.


Some analysts have noted that temporary factors, such as labour disruptions, likely weighed on activity in Q4, so things aren’t necessarily all bad. But a slowdown in job creation in the second half of 2019 does suggest that the economy did in fact step down a gear down over back end of the year.


Should growth persist below trend in the long run, the door for rate cuts will certainly remain open, but a number of factors will keep the BoC cautious regarding further easing. Trade headwinds appear to abating; the US and China signed their Phase One deal this week and the USMCA deal is supposedly going to be passed next week, removing two sources of uncertainty for the BoC.


Moreover, as last week’s home sales data made evident, the demand


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