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BoC Not Expected to Deliver a Holiday Rate Cut

Christmas rate cut.jpg

If you’re a floating-rate mortgage holder wishing for a Bank of Canada rate drop for Christmas, well, better luck next year.

The Bank of Canada’s Governing Council meets tomorrow for the last time this year. They’re widely expected to leave the overnight target rate unchanged at 1.75%—where it’s been since October 2018.

Recent GDP figures were subdued as expected, but they had positive underlying details. That likely sealed the deal for yet another rate hold from the Bank, say economists.

“The Bank of Canada will take [the GDP] report into [tomorrow’s] policy deliberations and we suspect they’ll be on hold—possibly for a long while,” wrote Robert Kavcic, Director and Senior Economist at BMO Economics.

National Bank of Canada’s Jocelyn Paquet agreed, writing: “All in all, this week’s GDP results reinforce our view that the Bank of Canada needs not provide additional stimulus."

Kavcic added that, while U.S. growth is slowing and trade continues to pose downside risk, there are other reasons why a rate hold is the most likely outcome tomorrow. One is that, “…Housing activity has rebounded smartly in B.C. and Ontario, and mortgage credit growth has accelerated again.”

Inflation too, gives the BoC no reason to move. It’s been almost right on the money at the BoC’s desired 2% target.

The Overnight Index Swap (OIS) market is overwhelmingly in agreement that the central bank will leave rates unchanged tomorrow. It’s got just a 5% chance of a rate cut priced in, according to Westpac.

Looking Ahead to Next Year…Are Cuts on the Horizon?

Despite Governor Stephen Poloz’s reluctance to follow the 46 other central banks that cut interest rates last quarter, Canada is expected to see its first rate cut in more than two years in 2020. Markets are pricing in almost a 100% chance of a quarter-point rate cut by next September (for what that’s worth).

Some economists think we’ll see a cut even sooner.

“…The third quarter ended with much less momentum in its final two months,” noted CIBC’s Avery Shenfeld in a research note. “We might still need a Bank of Canada rate cut in the first quarter to prevent term rates from rising prematurely, and to push the Canadian dollar to levels that support exports, which were dropping in Q3.”

Economists in general expect one rate cut next year followed by a hike in 2021, according to Bloomberg. It’s quite unusual to see just a single cut when a rate-easing cycle begins, however, so we wouldn’t put much stock in that forecast. Suffice it to say, few in the market foresee dramatic rate swings for a few years minimum.