The Bank of Canada kept the overnight rate unchanged at 0.5%, but took a cautious stance on future economic growth. Sara D’Elia speaks with David Tulk, Head of Global Macro Strategy, TD Securities, about what stood out in the statement and the outlook going forward.
I'm here with David Tulk from TD Securities to explain what happened.
David, what stood out for you in the statement?
Well, in terms of the overall headline, it was, as expected, in terms of the overnight rate being left unchanged.
But the real surprise was a bit of a curve ball from the bank in terms of their assessment of the economy.
So here they sound a little bit less optimistic.
They noted some of the downside risk that had opened up in the export picture.
It was something that the data has also shown.
But that left them at the end of the day, acknowledging that the balance of risk to the inflation outlook has shifted a little bit more to the downside, which gave the overall statement much more of a dovish interpretation than many had expected.
And what are the implications of that?
I think it does at some point maybe increase the risk that the Bank of Canada follows through with a rate cut.
It's not something that is in our base case outlook.
But if you think about further weakening in either the US economy or in Canadian exports, it does raise the chance that at some point the bank will have to potentially respond with more stimulus.
In terms of the US economy, the market's pricing about a 40% chance that they'll raise rates before the end of the year.
When do you expect we'll see a change in Canada?
Ah here, I think it could be the case where the bank won't follow the Fed higher.
So yes, the market does expect that the Fed could maybe squeeze in a rate hike by the end of the year.
But when you think about what's happening in Canada, it's the opposite economic shock.
So we're still struggling amid much lower commodity prices and an export sector that really hasn't capitalized on the strength of the United States.
So I think the Bank of Canada's going to be very, very patient and not follow the Fed higher for a couple of years.
So based on what you heard today, what are your expectations for the loonie?
I think this is a story where we're dealing with a couple of competing forces.
I think, at some point, you will still see a little bit more US dollar strength.
So that on balance does weaken the currency, especially if we get into an environment where the Bank of Canada contemplates cutting rates further.
That's a clearly unambiguously negative signal for the Canadian dollar.
But otherwise, I think we could still remain in this generally broad range that we've been trading in for the last three or four months.
David, thank you very much.
It was a pleasure.