This morning, the Bank of Canada (BoC) held the overnight target rate at 1.75%. In the Bank's press release, however, there were suggestions that a rate cut could be in the cards if growth continues to fall short of projections.

Along with an official press release the BoC released the first Monetary Policy Report (MPR) for 2020. Governor Stephen Poloz provided insight into the MPR with key measures and themes for this decision. 

Slowdown in Canadian Economy Could Continue

Perhaps the biggest surprise of the Monetary Policy Report was the Bank's measurement of Canadian growth. The Bank's data indicates that economic activity in Canada slowed during the last quarter of 2019, and that the slowdown could persist into 2020. 

As shown in the chart below, significant negative growth in exports suppressed overall growth in Q4 2019. The Bank projects positive export growth in Q1 2020, but that's just a projection.

As in recent Bank of Canada materials, the effect of "global trade conflicts" is prominently cited. With Canada preparing to sign the US-Mexico-Canada trade agreement (USMCA) next week, and the progress of the US/China "Phase One" deal, we can finally expect to see those concerns subside. Other cited causes for the slowdown in growth include "temporary factors" like strikes and an early winter in the Prairies.

Whatever the cause, should this slowdown continue into 2020 we can expect the Bank of Canada to intervene. We have seen the probability of a rate cut climb considerably since this morning's announcement, as investors are considering the possibility. There are those that believe that a rate cut will be held off until Stephen Poloz's last meeting in June, but Poloz would strenuously object to that notion.

Bank of Canada Probabilities

Below are the probabilities of a rate cut (or hike) at or by the next four Bank of Canada meetings. These probabilities are derived from the market for Overnight Index Swaps, which reference the overnight rate.

Cash Management 

If the overnight rate is cut, all accounts and deposits linked to prime would see an immediate cut in interest by at least 25 basis points. We are therefore advising our clients to move some of their excess cash into products with a fixed rate of return, to allay the risk of a rate cut.

Fixed-term GIC deposits are offering more attractive yields than cashable alternatives. We're encouraging our clients to examine their liquidity needs, and determine if fixed-term products can feasibly be included in the portfolio. A laddered strategy with fixed-term GICs can create a schedule of maturities for liquidity and cash flow. 

If you would like to review your current situation, please contact us for a complimentary portfolio review. 

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.