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Loonie Plunges After Dovish BOC Statement

Don Curren January 22, 2020

The Bank of Canada held its policy interest rate at 1.75% as expected this morning, but issued a statement with a decidedly dovish tone that acknowledged a recent slowdown in growth, a high degree of uncertainty and a “re-emergence of geopolitical tensions.”

The Canadian dollar tumbled sharply lower immediately after the release of the statement, declining about 0.6% against its US counterpart in subsequent trading.

The Bank has been an outlier among major central banks in recent months in refusing to shift toward a more accommodative policy stance, but today’s statement marks a significant shift in tone and a tilt toward at least the possibility of a rate cut.

The statement said data indicate growth in the near term will be weaker, and the output gap wider, than it projected in October, and estimated growth of 0.3% in the fourth quarter of 2019, down sharply from its October forecast of 1.3%.

“In determining the future path for the Bank’s policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast,” the Bank said in the final paragraph of the statement.

That contrasted sharply with the conclusion of its last statement in December, when it indicated it judged it appropriate to maintain the current interest rate setting.

The statement observed that exports fell in late 2019, “and business investment appears to have weakened after a strong third quarter.”

“Job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft,” the statement said. “In contrast, residential investment was robust through most of 2019, moderating to a still-solid pace in the fourth quarter.”

The Bank said some of the slowdown in growth in late 2019 was related to special factors that include strikes, poor weather, and inventory adjustments.

“The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted,” it said.

The statement conveyed a decidedly mixed view of the global context. “”The global economy is showing signs of stabilization, and some recent trade developments have been positive. However, there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences,” the Bank said, presumably referring to the downing of Ukraine International Airlines Flight 752 after an Iranian missile strike on January 8 and the death of all 176 people on board, including 63 Canadian citizens.

The Bank said it expects inflation will stay around the 2% target over the projection horizon, with some fluctuations in 2020 from volatility in energy prices.

Statistics Canada reported earlier Wednesday all-items Consumer Price rose 2.2% on a year-over-year basis in December, matching the increase in November and the consensus forecast. On a seasonally adjusted monthly basis, the CPI rose 0.4% in December

Don Curren
Market Strategist and Content Editor
dcurren@cambridgefx.com
@dbcurren

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