Over the course of 2019, the Bank of Canada (BoC) resisted cutting its overnight rate, while its global peers headed steadily lower. To support the bank’s hawkish stance, BoC Governor Stephen Poloz has been able to point to strong job growth. And at its latest meeting on December 4, Poloz again left the bank’s key interest rate unchanged at 1.75%. We now believe (barring a sharp economic slowdown) that the BoC may remain on hold until some time in 2020. And in a statement, the BoC said: "Future interest rate decisions will be guided by the continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy – notably consumer spending and housing activity."

In the months ahead, Poloz will have to continue to balance lowering interest rates against a number of risks. For one, if the BoC cuts rates it could drive up demand in some already inflated housing markets as lower mortgage rates kick in. As well, lower interest rates could entice Canadian consumers, already carrying near record levels of debt, to go even deeper into the red.

However, if the BoC remains on hold the economy could soften. In fact, there are signs that economic activity has already started to deteriorate with GDP growth of 0.0% and 0.1% for July and August respectively. Moreover, in the third quarter, the economy grew by an annualized rate of 1.3% as job growth slowed – suggesting a broader economic chill may be coming.

Business investment has also dropped and exports have weakened. Regional imbalances, particularly in energy-producing provinces, persist. Overall, the economy is anticipated to grow by 1.5% in 2019 and remain sluggish, expanding by 1.7% in 2020 and 1.8% in 2021.

On the positive side, household spending has shown resilience, with strong employment and wage gains supporting consumption. In addition, (with the exception of markets like Calgary and Vancouver) we’ve seen some stabilization in the housing sector, in part supported by a downward trend in interest rates since the fall of 2018.

Ultimately, where interest rates head in 2020 may be linked to the outcome of the U.S./China trade war. If it persists or escalates, the global economy could slow further. Indeed, Poloz has said that the trade war poses a major risk to Canada’s economic growth. However, the BoC said "There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years."

Still, the BoC has lowered its global growth projection to 2.9% for 2019 amid slowing global business, investment and manufacturing activity. The World Bank is more pessimistic, suggesting growth could fall to 2.6%, with risks, it warns, firmly to the downside due to a possible escalation of trade tensions.

Major central bank rates

The Canadian dollar will likely stay flat

The BoC’s hawkish stance has helped the Canadian dollar hold its value throughout much of 2019. Where it goes from here will depend on whether the bank cuts interest rates or remains on hold. For now, we do not believe a BoC interest rate cut has been priced in, and the dollar should remain range bound between US$0.73 and US$0.76 over the next quarter.

The Fed is also on hold – for now

The U.S. economy is still one of the world’s strongest, with GDP climbing by 2.1% in the third quarter, up from the Commerce Department's prior forecast of 1.9%. Growth may have been helped by the U.S. Federal Reserve’s decision to cut interest rates three times since July.

While President Donald Trump has repeatedly demanded that the Fed cut rates at a much faster and deeper pace, Fed Chair Jerome Powell has indicated that the latest cuts, which dropped the Fed rate to between 1.5% to 1.75%, could be the last rate reduction in this cycle. For its part, the market appears to believe that the Fed is likely be on hold until at least mid-2020.

That said, the Fed, which will hold its final meeting of the year on December 11, has both the will and the room to cut interest rates if needed. And since the Fed last cut rates in mid-September, a number of key economic indicators have suggested that the U.S economy is slowing, with the U.S./China trade war hurting manufacturing and business investment.

And whether the Fed’s latest round of interest rate cuts can keep the U.S. economy growing, and the Fed on the sidelines, will be closely watched in 2020.

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.