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October 30, 2019

BoC holds – Fed cuts rates

Can the Bank of Canada continue to hold the line on interest rate increases?

To fend off a slowing global economy, nearly 30 central banks have cut interest rates this year. But the Bank of Canada has been conspicuous in its absence. It has even held to a more hawkish tone while its counterparts, including the U.S. Federal Reserve and European Central Bank, have moved rates steadily lower.

At its October 30 meeting, the BoC continued to hold rates steady, keeping its key interest rate unchanged at 1.75%. At the same time, the U.S. Federal Reserve cut its overnight rate for the third time since July, to a range between 1.50% to 1.75%. With the latest rate cut, the Fed’s key rate is now trading in the same range as the BoCs.

Canadian economy appears resilient – for now

Given Canada’s relatively strong economic indicators, BoC Governor Stephen Poloz has been able to hold rates steady. Job growth has been strong, with the economy adding 135,000 jobs in August and September. The slowing Canadian housing market, which had been a concern, appears to have stabilized as mortgage rates came down slightly with falling bond yields. As well, inflation is running slightly below the BoC’s target range, and despite the U.S./China trade war, business confidence has held up.

However, the BoC’s next meeting in December will be closely watched by the market. By then, many economists believe there could be clear evidence that slowing global growth is biting into the Canadian economy. If so, Poloz may no longer be able to resist the move to lower interest rates, with one coming in December or early in the New Year.

Moreover, in its economic forecast the BoC said it expected growth to slow in the second half of the year. It cut its third-quarter growth estimate to 1.3% annualized from 1.5%, and predicted the economy would grow by 1.3% in the fourth quarter.

The BoC also noted that the fallout from the U.S.-China trade dispute could yet significantly damage business investment and exports, with both of these areas of the economy expected to contract. As well, the bank noted that the global slowdown has undermined commodity prices, further hurting the Canada’s economy.

In terms of the Canadian dollar, the BoC’s decision to hold the line while the Fed cut, has helped buoy the loonie’s value, with it trading in the US$0.75 range. If the BoC continues to pause on rate hikes, the Canadian dollar could retain its relative strength against other currencies.

Major central banks and their key interest rates

Chart shows the key interest rates used by central banks around the world, to show that at 1.75%, the Bank of Canada has one of the highest rates when compared to other countries.

The Fed: Can it resist Trump?

Despite the three rate cuts by the Fed since July, President Donald Trump has repeatedly demanded that the Fed cut rates at a much faster and deeper pace. In one tweet, he called the Fed governors “boneheads,” and demanded that they introduce negative interest rates, ostensibly, he said, to refinance the government’s $22 trillion debt.

However, Fed Chair Jerome Powell indicated that it may be the last rate reduction in this cycle. However, since the Fed last cut rates in mid-September, a number of key economic indicators have suggested that job creation is slowing, with the U.S./China trade war hurting manufacturing and business investment. That said, the U.S. economy is still growing, and whether the latest round of cuts can head off a recession and keep the Fed on the sidelines remains to be seen.


This commentary contains information in summary form for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.

© Sun Life Global Investments (Canada) Inc., 2019. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies

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