Interest rate cut more likely by the end of 2019 say economists

Panel convened by Reuters still split on whether the BoC will move this year or next

Interest rate cut more likely by the end of 2019 say economists
Steve Randall

The Bank of Canada has seemed keen not to follow the trend of many of its peers by holding interest rates steady.

The strategy, even as the Fed and other major central banks have been reducing rates, may soon be reversed though according to a panel of economists polled by Reuters.

With the US-China trade dispute continuing – and escalating in the last month – economists believe the risk is increasing of a slowdown for the global economy.

That does mean the Bank of Canada will be under more pressure to follow the lead from other central banks and make an interest rate cut, but most of the panel of 39 economists believe a cut will not happen when the BoC meets on September 4.

Most (22 of the 39) also believe that the BoC will hold interest rates for the rest of 2019 but the others think there will be a cut in the fourth quarter including two who see a 50-basis-point cut.

“The risks from heightened trade tensions, and the new round of tariffs which are going to take effect this weekend, just increase the downside risks to the economic outlook in the second half of the year,” Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets told Reuters.

Most likely scenario
While the poll shows a 60% chance that the Bank of Canada will cut interest rates by the end of 2019, there is an 80% chance of it happening by the end of 2020.

The most likely scenario appears to be a 25-basis-points cut to 1.50% in the first quarter of 2020 with that holding through to the end of the year.

Another recent poll of economists from comparison site also found little appetite for a rate rise next week.

But two leading economists believe that the meeting on September 4 will bring a rate cut due to trade and political issues that may warrant an earlier move.

Concordia University professor Moshe Lander and Atif Kubursi, president of Econometric Research, are in the minority among a panel of economists and housing market experts convened by comparison site

They point to the slowing US economy; economic troubles in the UK, China, and Germany; and the federal election; as factors that could tip Governor Stephen Poloz and his team to cut rates.

The other 10 members of the panel believe that the BoC will keep rates on hold, but a total of 4 think the bank should make a cut. All agree that its next move, whenever that comes, will be a reduction.

“Domestic economic conditions do not warrant a change in the Bank of Canada's target overnight rate at this stage: inflation is at target, real policy rates are negative, the housing market is strengthening, household credit growth is firming, and wage growth is very strong,” said Brett House, deputy chief economist at ScotiaBank.