Posthaste: The real reason Bank of Canada may stay on the sidelines for awhile
Growth is likely to slow more than the Bank of Canada expects in the fourth quarter and the labour market is softening, but another issue looming on the horizon may give the BoC reason to keep its powder dry, say economists.
Capital Economics estimates that the unseasonably cold weather, Keystone pipeline outage and CN Rail strike alone will shave 0.3% off GDP for November, slowing growth to 0.8% annualized in the fourth quarter, lower than the Bank’s forecast of 1.3%. That would appear to leave the door open for a cut, but there’s another concern.
“While the Bank’s inflation forecasts make a convenient excuse, it’s pretty clear that the real reason why the Bank hasn’t cut interest rates is its fears about pouring further fuel on the resurgent housing market,” said Capital.
Capital says housing price momentum is building, with monthly gains of 0.5% m/m in each of the past three months. It estimates that if that continues, by March house price inflation will be near 5%.
According to a recent poll by Reuters, no economists expect a rate cut next week, and a slim majority expect the bank to hold to the end of next year. Four of the top five Canadian banks, however, expect at least one rate cut by the end of 2020.
“If the Bank isn’t prepared to cut interest rates next week, it’s hard to see why it would do so in January. By that meeting, house price inflation is likely to be above 3% and the trajectory will be clear,” said Capital.
Capital sees the Canadian dollar rising to 78 US cents next year from 75, but that’s mainly on an expectation that oil prices will rise.
Here’s what you need to know this morning:
U.S. Federal Reserve releases Beige Book at 2 p.m. ET
Infrastructure Minister Catherine McKenna will deliver a keynote address to the Federation of Canadian Municipalities in Ottawa
Canada 2020 hosts the fourth annual Indigenous Economic Development Forum in Ottawa
National Farmers Union national convention in Winnipeg
Alimentation Couche-Tard discusses second-quarter results in conference call
Notable earnings: BRP Inc.
Today’s data: U.S. GDP, U.S. durable goods orders
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