Bank of Canada sets the stage for easing

As expected, the Bank of Canada kept its overnight rate target unchanged at 1.75 percent at today's Governing Council meeting.  As the press release notes, "Canada's economy is operating close to potential and inflation is on target".  Moreover, growth was higher than the Bank had expected in Q2, and wages have accelerated sharply in recent months, reflecting the tightness in the labour market.

Despite these apparent positives, the Bank is cautious about the outlook, expecting growth to slow in the second half of the year.  The reason for this is simple: trade wars initiated by the Trump administration are starting to take a toll on the global growth outlook, which will inevitably have an impact on Canada's very open economy sooner rather than later.  The press release makes it clear that these developments will be the key drivers of the Bank's policy decisions in the coming months.

The problem which the Bank of Canada (and other central banks) face is that monetary policy may prove largely ineffective in supporting growth in current circumstances.  Even with borrowing costs at rock-bottom levels, businesses will be reluctant to invest as long as the threat of capricious tariffs persists.  Fed Chair Jerome Powell voiced this uncertainty in announcing the FOMC's latest policy decision, earning himself a torrent of abuse from Donald Trump for his pains.  A rate cut by the Bank of Canada might provide some marginal stimulus by weakening the exchange rate, but there is little likelihood of it fully offsetting the growing impact of tariff wars. 

Today's Governing Council meeting was the last before Canada's Federal election.  The next opportunity for the Bank to cut rates falls on October 30.  Look for Governor Poloz and his colleagues to take every opportunity in the coming weeks to signal their intentions, while avoiding saying anything that might be regarded as overtly political.  Markets are pricing in an even chance of a rate cut next month, and a move by the end of the year now looks almost certain, barring a sudden end to the tariff insanity. .