Canada’s economy is ‘no longer deteriorating,’ economist says as BoC holds rates

The Bank of Canada held its key interest rate steady at 2.75 per cent for the third consecutive decision on Wednesday, and one economist says resiliency in the Canadian economy made it easier for the central bank to remain on the sidelines.

“The economy is no longer deteriorating,” Charles St-Arnaud, chief economist at Alberta Central and former economist at the Bank of Canada, told BNN Bloomberg in a Wednesday interview.

“We’re no longer in the situation in April and May where the uncertainty was so high, the shock on confidence both on businesses and consumers was so big that we were seeing a lot of delays in spending, but now we’re seeing a recovery in that confidence.”

Canada’s economy has so far avoided the worst-case scenarios some experts had predicted earlier this year when U.S. President Donald Trump began threatening to impose tariffs on Canadian goods.

The Bank of Canada said Wednesday that there is increasing clarity around the ongoing “global trade conflict,” but acknowledged that the outlook for the Canadian economy remains unclear as Ottawa and Washington have yet to ink a trade deal before Friday’s tariff deadline.

The bank also reiterated its mandate to keep price growth under control. The headline rate of inflation in Canada ticked up to 1.9 per cent in June from 1.7 per cent in May, according to Statistics Canada.

St-Arnaud said that as long as the economic outlook remains uncertain, the bank will be making its policy decisions largely on the basis of inflation trends.

“It’s really their view on inflation, because that really will dictate whether or not they can or they will cut rates again this year, and it’s clear that they’re in the camp that what we’re seeing in terms of stickiness in inflation will be temporary… but we’ll have to see if that really happens,” he said.

“If it continues to be sticky, I think the Bank of Canada might decide to be on hold for longer.”

‘Inflation problem’

Resiliency in the economy and labour market in Canada has given the central bank more breathing room to fully assess the impact of Trump’s tariffs, which take time to work their way through supply chains, St-Arnaud explained.

In response to comments on social media made by Ontario Premier Doug Ford on Wednesday calling for rate cuts from the Bank of Canada, the central bank’s governor Tiff Macklem said the bank is “going to make sure that… a tariff problem, does not become an inflation problem.”

If inflation pressures ease in the coming months and the Canadian economy remains hampered by trade uncertainty or U.S. tariffs, many experts believe the Bank of Canada will resume cutting rates by the end of the year, something Macklem hinted at on Wednesday.

“If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate,” he said.

Ashish Dewan, investment strategist at Vanguard Canada, told BNNBloomberg.ca in a statement on Wednesday that he expects the Bank of Canada to reduce its policy rate by 50 basis points to 2.25 per cent by the end of the year, “given a lower growth environment.”

That sentiment is shared by Joe Brusuelas, economist with national assurance, tax & consultancy firm RSM, who told BNNBloomberg.ca in a statement Wednesday that the Bank of Canada will and should cut rates two more times this year.

“Like its neighbour to the south, the Canadian economy appears to be sufficiently strong enough to absorb the body shots caused by the disruption in trade. In particular, private sector firms appear to be hiring at a solid pace and are simply getting on with it despite U.S. trade tensions,” he said.

“Should this continue, this will slowly bring down the unemployment rate and free up the Bank of Canada to resume cutting rates in the near term.”

Labour and confidence

St-Arnaud said that the labour market, which showed some unexpected strength in June by adding 83,000 jobs, will be important to watch going forward, but added that individual monthly job reports can be volatile and difficult to interpret.

“Sometimes you have a big, outsized number either on the upside or the downside that happens and kind of breaks the trend and you have to wonder… until we get the new number next week it will be hard to see what is really the underlying story,” he said.

On the whole so far this year, the Canadian labour market remains weak, St-Arnaud said, but not as weak as was expected at the outset of the trade war, much like Canada’s broader economy, he argued.

“That’s why I’ve kind of been focusing a bit more on what’s going on with confidence. We’ve seen a rebound in business confidence, we’re seeing a small rebound in consumer confidence or at least we’re seeing a floor being put on the economy and I think that probably matters a bit more,” he said.

“What the BoC is really trying to communicate is there’s probably going to be some more rate cuts this year, my view is that there’s probably another one, but they don’t want to say that they are in a rush to cut, they just want to gather more information and see how the economy is really behaving.”