October rate cut looking more likely

Following the escalation of the US-China trade war and further signs of weakness in much of the global economic data, investors have increased their bets on looser monetary policy in Canada. Market pricing implies that the chance of an October rate cut has risen from an average of 32% in July to 66% now. (See Chart 1.) Admittedly, the data at home do not yet justify a cut. Headline and core inflation were both in line with target in July, wage growth jumped to 4.5% y/y and GDP appears to have expanded by a very healthy 3.1% annualised in the second quarter. This will give policymakers pause for thought and explains why markets are pricing in a less than 20% chance of a rate cut at the meeting next week. But Canada’s position as a small, open economy means there is little prospect of the country getting through the global slowdown unscathed. We expect the Bank of Canada to cut interest rates in October and ultimately take the policy rate down from 1.75% to 1.0% by early 2020.