Bank Of Canada Didn't (But Perhaps Should Have) Cut Rates Yesterday

The Bank of Canada remains hopeful that current levels of employment and future income growth will pull the consumer out of its current doldrums (BOC April Monetary Policy Report). The consumer (consumption) accounted for about 67% of GDP growth in 2018 (see table above). For 2019, the BOC forecasts consumption growth of 0.9% and GDP of 1.2%, which looks like it is asking consumption to grow to be 75% of the Canadian economy (to offset the negatives from Housing and Business Fixed Investment).

Yet Canadian households currently (as mentioned in Tuesday's blog) are seeing their debt burdens growing at a faster rate than their incomes. Without a rate cut, it is hard to see the already stretched households carrying the Canadian economy through 2019.

The BOC says they will be "data dependent", which means that they will act if economic data should undermine their forecast.

However, their forecasts from January (above table, numbers in parentheses) have all been revised lower. It's not their fault, it is the global economy and trade uncertainty that have confounded previous attempts to forecast better times. Not to be outdone, they are still forecasting better times and not giving in to less optimistic views.

Bond markets cast their votes with a rally in the 10 year Government of Canada bond that pushed its yield back down to be close to level with the 3 month Treasury Bill. That my friends is what we call a "flat" yield curve. That happens when short-term interest rates (those which are under the control of the Bank of Canada) are pushed higher while at the same time demand for the safety of long-term bonds (on the back of economic slowing) drives yields lower.

If economic data (in the future) continue to add to demand for the safety of Government of Canada 10 year bonds, yields may in fact move lower. That, my friends, is what we refer to as an "inverted" yield curve. There has been lots of discussion around this inverted yield curve scenario (and its relevance in current times), but if it persists, it will likely be the result of further economic slowing and possibly recession. At which point the Bank of Canada will have to act to lower interest rates. So they will play the waiting game.

Long ago, on a wilderness canoeing adventure, in a discussion about what to expect from the river we were paddling on, my canoe mate turned to me and said : "Scotty, always hope for the best, but prepare for the worst". That has stuck with me for the last 40 years or thereabouts and has been my mantra for many things in life (including the management of my and other peoples money).

Certainly the Bank of Canada is hoping for the best.

We (at High Rock) shall to. But we will also be prepared for what should happen if, like their previous and rosier forecasts, they should come up a bit short of the mark.