Central Bank Keeps Lid on Rate Hikes, Cites Weak Economy
The Bank of Canada kept its key interest rate unchanged and also downgraded its growth forecast for 2019. The Canadian economy had been chugging along in 2017 and 2018, but hit a brick wall in the fourth quarter of 2018, with the economy expanding at just 0.4%. The Bank of Canada blamed the slowdown on a weak Canadian economy, sluggish housing market, depressed oil prices, rising personal debt levels, and fears of a global trade war.The Canadian economy was running on all cylinders in 2017 and for most of 2018. This led Bank of Canada governor Steven Poloz to raise its lending rate five times between mid-2017 and fall 2018.It’s been a different story in 2019. On April 24, the Bank of Canada announced that it was keeping the overnight lending rate at 1.75%. This is the fourth time in a row that the Canadian central bank has kept its key lending rate at 1.75%.1
The last time the Bank of Canada raised its rate was on October 24, 2018. It’s unclear when the central bank will raise rates again, but its goal is to get the rate in a “neutral range” of 2.25% to 3.25%.The Bank of Canada said the global economy had slowed more than it thought it would in January. In January, the Bank of Canada predicted that the country’s real gross domestic product (GDP) would advance 1.7% this year. It has since downgraded this forecast to just 1.2%. In the first three months of 2019, Canadian GDP is projected to grow just 0.3%.The Bank of Canada is optimistic about the country’s long-term economic outlook. It expects the Canadian economy to pick up in the second quarter of this year on the heels of stronger housing activity, consumer spending, and exports. This should, the bank believes, build momentum throughout 2019, resulting in 2020 GDP of 2.1% and 2021 GDP of 2.0%.That is still significantly lower than U.S. GDP, which came in at 2.2% in the fourth quarter of 2018 and 3.2% in the first quarter of 2019.The Bank of Canada may be a little too optimistic though on its near-term outlook for the Canadian economy. Canada’s housing market took a hit in 2018 thanks to the new stress test that all home buyers have to pass. Despite the downturn, the federal government has said it has no plans of making changes to its strict lending rules. Regardless, the Bank of Canada expects the country’s housing situation to improve.Canada’s energy sector is also taking a big hit with low oil prices, which will continue to weigh down on GDP growth.The Bank of Canada also believes that growth in employment income will help consumers boost economic growth. But that too may not pan out the way the Bank of Canada expects.Canadian wages are stagnant and debt levels are near record levels. Keeping interest rates low will help Canadians straddled with debt, but it’s going to be hard to get ahead of debt and start spending freely if wages are flat.It’s also going to be difficult since roughly half of all Canadians are on the verge of insolvency. According to a new study approximately 48% of Canadians say they are just $200 away from financial ruin each month. That’s up from 46% who said the same thing in the previous quarter.2
The study also found that more than a quarter (26%) of Canadians have “zero funds” at the end of each month because they don’t make enough to pay their bills and cover their debts.The economic downgrade by the Bank of Canada doesn’t really bode well for Canadians in the second half of 2019. Nor does it point to wage hikes.Even in a best case scenario, chances are good the Canadian economy will not respond the way the Bank of Canada thinks it will. Stephen Poloz said the biggest threat to the Canadian economy is a global trade war. And that’s something entirely out of the hands of the Canadian consumer.Most of the focus of a global trade war centers on the U.S. and China, but it goes beyond that. There are currently 47 countries experiencing an economic slowdown. While this may be temporary, it could leave a lasting impression on the Canadian economy.Yes, Canada, the U.S., and Mexico have agreed, in principle, on a new trade deal, referred to as CUSMA in Canada (and USMAC south of the border). Closing the CUSMA trade deal would provide some economic relief and confidence going forward, but it hasn’t been signed yet.
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The Bank of Canada has taken a dour look on the Canadian economy, lowering its expectations for growth this year to just 1.2%. While the Bank’s outlook for the remainder of the year is upbeat, there is reason to believe this optimism may be misguided. This could have a negative impact on the Canadian economy and equities. No matter what happens to the Canadian economy or TSX though, the trading professionals at Learn-To-Trade.com
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- “Bank of Canada maintains overnight rate target at 1 ¾ per cent, Bank of Canada,” April 24, 2019; https://www.bankofcanada.ca/2019/04/fad-press-release-2019-04-24/.
- “Nearly Half (48%; +2pts) of Canadians Are on the Brink of Financial Insolvency; Struggling to Make Ends Meet at Month-End, Ipsos,” April 22, 2019; https://www.ipsos.com/en-ca/news-polls/MNP-Debt-Index-Wave-8.
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