Canadian Economy Returning to Potential Growth, but Global Trade Uncertainties Still Linger

Garo Mavyan | Retail FX & Precious Metals Trader

In its most recent decision, the Bank of Canada announced that it would leave its key interest rate unchanged at 1.75%. Though anticipated, this outcome marks the sixth straight meeting that the bank has elected to keep the interest rate steady, as it cites the potential for a return to domestic economic growth. The decision seemed to reinforce the perspective of Bank of Canada Governor Stephen Poloz, who for months has maintained that the recent 'soft patch' in the Canadian economy was temporary. Based on recently released data, it would appear that Poloz finally has the evidence he needs to support his view that things are on the rebound: GDP grew by 0.3% on a monthly basis in April to surpass market expectations, Canada's trade balance was in a surplus position in May as exports rose by 4.6%, and the Canadian Dollar has gained about 4.3% on the US Dollar as oil prices continue to climb.

Despite a strengthening in the economy, a persistent global economic slowdown means that the Bank of Canada must still remain vigilant to the growth risks associated with an increasingly aggravated international trade environment. As such, the bank has readjusted its global growth forecast down for the remainder of 2019 from 3.2% to 3%. Regardless, the bank concluded that its current course regarding the interest rate is appropriate in balancing a Canadian economic renewal and global uncertainties. With that finding, Poloz finds himself at odds with other central bankers in the US and Europe, who have signaled they may introduce rate cuts to stem the effects of ongoing international trade conflicts. In the US, Federal Reserve Chair Jerome Powell's recent testimony to Congress indicated that lingering trade disputes—particularly between the US and China—have started to outweigh domestic economic momentum. The market aptly interpreted such statements to suggest that the Fed is now willing to look at cutting the interest rate to support economic growth. In Europe, the European Central Bank is similarly facing lower growth forecasts leading the market to believe that the Eurozone will see a potential rate cut soon as well. Despite the concerns of his international colleagues, Poloz will most likely remain data-dependent but cautious as he commands Canadian monetary policies. At this stage, if the economy continues on its current path, it is unlikely to see Poloz shifting towards rate cuts for the remainder of the year.

Although it would seem that the headwinds affecting the Canadian economy are beginning to dissipate, the horizon is still clouded, and there is no telling yet what challenges Stephen Poloz and the Bank of Canada will face in the coming months.


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