Bank of Canada Was Close to Cutting Rates Again

Bank of Canada Holds Key Rate at 0.5%

The Bank of Canada kept its key lending rate at 0.5% (unchanged since July 2015) and reduced its outlook for the Canadian economy, blaming soft exports. The Bank of Canada trimmed its economic growth outlook for 2016 to just 1.1% from the July forecast of 1.3%. That may not sound like much of a downgrade, but it represents a 15% cut.¹ Despite solid export data in July and August, it was not enough to offset the contraction over the previous five months. Weak U.S. business spending and weaker expectations for the housing market in the U.S. (Canada’s biggest trading partner) also helped the Bank of Canada lower its economic outlook. The central bank does not expect the Canadian economy to rebound any time soon. The Canadian economy is projected to grow by 2.0% in both 2017 and 2018. Because of the weak economic outlook, it is thought the Bank of Canada will not raise rates in 2017; the earliest possible hike is not expected until mid-2018. Lowering rates further is not out of the question. In fact, Bank of Canada governor, Stephen Poloz, said the central bank was close to adding more monetary stimulus to the economy but held off because of a number of uncertainties, including the effects of the new federal mortgage rules, outlook for exports, and business confidence ahead of the November 8 U.S. presidential election.² This dovish tone suggests the Canadian economy is not as robust as some thought it was.

Canadian Economy Downgraded Again

It’s not just the Bank of Canada that is souring on Canada’s economic outlook. The International Monetary Fund (IMF) trimmed its outlook for Canadian economic growth to 1.2% in 2016 and 1.9% in 2017. This represents a 0.2% drop in both cases from the IMF’s July projections.³ The IMF was not as optimistic about the Canadian economy but it cited similar reasons to be cautious, including weaker oil output as a result of the wildfires in Alberta. It also cited concerns about the global economy and impact of fiscal stimulus around the world. Weaker growth in the U.S. could have a detrimental impact on the Canadian economy. Canada’s natural resource sector accounts for 15% of the country’s Gross Domestic Product (GDP).⁴ Energy accounts for the biggest portion at 7.2%. In 2015, natural resource exports were valued at $220.0 billion. The U.S. accounted for 76% of all natural resource exports, followed by the United Kingdom (6%), and China (4%). An economic slowdown in the U.S. would undercut Canada’s export dependent economy. And undercut economic growth. According to the most recent data 71% of Canada’s crude oil production was exported to the U.S.⁵

TSX Remains Bullish Despite Weak Economics

Despite worries about the Canadian economy and global growth, the TSX remains bullish. After trending downward throughout 2015, the TSX has had great momentum for much of 2016, advancing almost 15%. And is only 5.5% below its September 2014 record levels. The main reason the TSX remains bullish is the price of crude oil. In January, fears of a global recession sent oil prices below $30.00. This sent the Canadian dollar down to $0.68 U.S, its lowest level in 16 years. Oil prices have moved steadily higher since February as stockpiles in the U.S. are depleted and major oil-producing countries in the Middle East consider cutting back on production. Crude oil is currently trading at around $52.00 per barrel. Because the Canadian dollar is tied to oil prices, the value of the Loonie has also increased in step and is now at $0.76 U.S.

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1. “Bank of Canada maintains overnight rate target at 1/2 per cent,” Bank of Canada, October 19, 2016; https://www.bankofcanada.ca/2016/10/fad-press-release-2016-10-19/.
2. Isfeld, G., “Bank of Canada was close to cutting interest rate Wednesday, Stephen Poloz reveals,” Financial Post, October 19, 2016; https://business.financialpost.com/news/economy/bank-of-canada-actively-discussed-more-stimulus-but-uncertainty-convinced-policymakers-to-hold-rate-instead.
3. “IMF Sees Subdued Global Growth, Warns Economic Stagnation Could Fuel Protectionist Calls,” International Monetary Fund, October 4, 2016; https://www.imf.org/en/news/articles/2016/10/03/am2016-na100416-weo.
4. “10 Key Facts on Canada’s Natural Resources,” Government of Canada, last accessed October 20, 2016; https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/files/pdf/10_key_facts_nrcan_2016_e.pdf.
5. “Crude Oil and Petroleum Products,” Government of Canada, last accessed October 20, 2016; https://www.neb-one.gc.ca/nrg/sttstc/crdlndptrlmprdct/index-eng.html.