On March 6th, 2019, Canada’s central bank announced the decision to keep its benchmark interest rate unchanged at 1.75 percent and delivered a much more dovish assessment suggesting that future rate hikes have become increasingly uncertain.
The Bank of Canada (“BoC”) says the sharp slowdown in economic activity which began in Q4 2018 is worse than originally expected, including Canada’s slumping oil patch. The BoC further singled out softness in the housing market and consumer spending as reasons for a gloomier outlook. The BoC’s recent statement is a significant departure from the hawkish sentiment delivered in their October 2018 statement when global outlook was said to be “solid” and the overnight interest rate was raised 25 basis points to 1.75 percent.
The announcement and overall tone from the bank’s governing body has sparked debate on what direction interest rates will be heading. The consensus among economists polled by Bloomberg is that the bank will stand pat again at the upcoming April 24th meeting, however, trading in investments known as Overnight Index Swaps (“OIS”) suggests there’s approximately an eight percent chance of the bank changing its direction entirely and cutting its benchmark interest rates. If it happens, it would be the first rate cut since 2015.
Last week, TD Securities’ senior rates strategist for Canada, Andrew Kelvin, advised clients that the BoC “will likely hold off raising interest rates through all of 2020 and could even cut rates later this year.” Kelvin wrote, “following the sharp slowdown in economic activity last quarter, we no longer see a plausible path back to full employment within the next two years [and] we think that 1.75 percent will mark the top of the tightening cycle with no change in policy expected for 2020 either.”
This piece ties well and acts as a follow up to the article Curtis Leonhardt (view here) published in January 2019 which notes the strong correlation between bond yields with interest rates, and interest rates with cap rates. In short, the data provided in Curtis’ article suggest that interests rates may be on the decline again soon. This prognosis is now seemingly shared by recent announcements by the BoC and widespread public debate amongst highly respected Canadian economists and business leaders.
The remaining scheduled dates for the interest rate announcements for 2019 are as follows:
- Wednesday, January 9 – Held Overnight Interest Rate at 1.75%
- Wednesday, March 6 – Held Overnight Interest Rate at 1.75%
- Wednesday, April 24*
- Wednesday, May 29
- Wednesday, July 10*
- Wednesday, September 4
- Wednesday, October 30*
- Wednesday, December 4
*Monetary Policy Report published