BoC cuts overnight rate (again); slashes growth outlook
Sadiq S. Adatia
Opinions as of July 15, 2015
FLASH MARKET UPDATE
The Bank of Canada has just boosted the coverage of the "insurance policy" it took out to protect the economy from the effects of low oil prices. This time however, the central bank is pointing a finger at more factors. From today’s statement:
"The Bank's estimate of growth in Canada in 2015 has been marked down considerably from its April projection. The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities."
Clearly the "weaker-than-expected" non-energy export picture is playing a significant role in the central bank's decision-making process.
We have felt strongly that it would be appropriate for the BoC to follow up its January cut with a second and so we take this as a good sign. We believe today's 25 basis point cut in the overnight rate (to 0.5%) will be supportive of the economy and markets in the short term; however, early market reaction has been more muted than what happened following the more unexpected January reduction. The yield on Government of Canada 2-year bonds fell about 10 basis points immediately after the statement was released, while the yield on Government of Canada 10-year bonds fell about 5 basis points. The Canadian dollar dropped about one cent versus its U.S. counterpart.
More importantly in our view is the BoC's cut to its outlook for economic growth. In April, the central bank was taking a rosier view of things, projecting GDP growth of 1.9% for this year. Now it’s projecting growth of 1.1%, which includes a forecast for a Q2 contraction similar to what we got in Q1.
We never bought into the BoC's April optimism and even warned about this particular scenario. The central bank said it was expecting weakness from low oil prices to be front-loaded in the year, but now it's recognizing there are bigger things afoot and the likelihood of a near-term rebound is shrinking.
Today’s grim outlook brings the central bank's position more in line with our own. We expect increasing pressure on the domestic equity market.
© Sun Life Global Investments (Canada) Inc., 2015. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.