The Bank of Canada left rates steady in its most recent announcement, but cites the risk of the ongoing US-China trade tensions to the global economy. Anthony Okolie talks with James Marple, Senior Economist, TD Bank Group.
- No surprise the Bank of Canada left rates unchanged. James, did anything in the language change?
- Yeah, certainly the emphasis on global risks. They started out the statement saying, we're not going to change policy. But we're really cognizant of the risks on the external front. We see other central banks starting to ease policy in response. That has supported financial conditions.
The data have all come in relatively solid. And really, even their expectations for near-term growth have been revised upward. But it's really a risk management approach that they're emphasizing, that as long as those external risks are prevalent, they're going to continue to be cautious, and I think stay on the sidelines.
ANTHONY OKOLIE: So the Bank of Canada, of course, touched on the global risks, the trade tensions between the US and China. What about the trade tensions between Canada and China, particularly when it comes to our exports of meat and pork and canola? Is that a risk for the Bank of Canada?
- Yeah, I mean, certainly the big challenge is that this disagreement between China and the United States has cast a pall over investment. And even exports from a small country, like Canada, affecting commodity prices in terms of trade. But certainly, it does not help that Canada has this sort of side dispute with China and is being sort of brought into the US access.
And the conflict with the US is leading to these sort of side conflicts with Canada. And we really don't need that. I mean, China is also a big export market and affects commodity prices more broadly as it's hit. So, yeah, it's not helpful. And I think something that the Bank of Canada will also monitor as it's monitoring the downside risk to the economy.
ANTHONY OKOLIE: And did anything change today that will make you change your outlook for interest rates? What's your outlook on interest rates going forward?
- Sure. Nothing really in this statement. I mean, I think markets-- we got a pretty dovish statement. But we had not been anticipating the bank to come out and say, the Canadian economy's doing great. We still think we could raise rates. I mean, you might have taken that stand just on the basis of inflation being close to target.
But we're a small open economy highly dependent on exports. We have a central bank that is really aware of that. So nothing causes to change our view but made us more confident in this view that the Bank of Canada is going to remain on hold.
And if we do see this situation deteriorate on an external front, and we have to see more rate cuts from, for example, the Federal Reserve, I think this statement made clear that the Bank of Canada would not be far behind.
- So on hold for 2019. And you don't expect any cuts, again, in 2020 as well.
- I mean, yeah. With our baseline outlook, which is actually quite similar to the Bank of Canada, is a little bit less growth next year than they had previously on some of those global risk concerns but not enough that would require more rate cuts. As long as we don't see a real further exacerbation in trade tensions or deterioration, I think that remains a good call.
- And finally the loonie-- where'd you see that going in the future?
- Well, I think a lot of it's been priced in terms of expectations for Fed policy and the Bank of Canada. I mean, there is now an expectation the Fed will cut rates, likely in July after what we heard from my Chair Powell this morning and probably at least one more cut over the end of this year.
I mean, that, I think, explains some of the strength we've seen. As long as it's held to 25, 50 basis points in insurance cuts from the Federal Reserve, I think that the loonie will be pretty close to its current level, if not, a touch higher.
I think at some point that the loonie actually becomes a concern. And again, that's why you can't see too much of a divergence between Canada and the US. And if the US were required to cut more, I think that's a world in which the Bank of Canada would follow.
ANTHONY OKOLIE: When you talk about concerns, really, from an export's standpoint.
- That's right. I mean, they will be consuming. It is a transmission of monetary policy. They are going to be concerned with the export competitiveness. They're not going to sit by and watch the dollar rise to parity as long as those risks are there.
- James, thank you very much for your time.
- You're welcome.