Bank of Canada could cut rates more aggressively, RBC says

With all eyes on the forthcoming gross domestic product report, and in light of decisive moves by The Fed, the Bank of Canada could become more aggressive with its own rate cuts.

That’s the opinion of Nathan Janzen, Assistant Chief Economist at the Royal Bank of Canada.

In a September 20 note, the economist laid out the current environment around next Friday’s GDP report.

“Early reports are pointing to a 0.1% increase in July GDP that would be slightly higher than the advance estimate for an unchanged reading a month ago but would still extend a string of softer readings dating back to May,” he wrote. “Most of a 2.1% annualized increase in Q2 GDP came from a 0.4% jump in output in April. Growth softened to 0.1% in May followed by no growth in June. The increase we expect in July is still historically soft and would leave output tracking another per-capita GDP decline in Q3—marking the eighth out of the last nine quarters. We expect the small increase in July growth was evenly split across goods and services. The details of the July manufacturing sales report are consistent with a 0.6% increase in manufacturing GDP. But, a drop in oil sands production in Alberta and a pull-back in oil drilling activity is expected to weigh on growth. Meanwhile, wholesale and retail sales were both up in July, but our tracking of credit card transactions is pointing to little change in spending in the hospitality sector.”

Janzen says expect rate cuts every time the BoC meets.

“Slowing inflation has allowed the Bank of Canada to shift focus to concerns about a softening economy and a rising unemployment rate,” the economist argued. “Our forecast of around 1% annualized growth in Q3 GDP would be well below the BoC’s July forecast for a 2.8% increase. Our base case forecasts assume the BoC will continue cutting interest rates at a pace of 25 basis points per meeting, but with risks tilted to a faster pace of reductions (in line with the U.S. Federal Reserve’s larger 50 bps initial cut) if the economy softens significantly further.”