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Look for a dovish Bank of Canada next week — with cuts coming soon, economists say

Bets on a Bank of Canada rate cut next week fell even further today after economic data came in stronger than expected.

The implied chance of a rate cut according to overnight index swaps sank from 15 per cent to 5 per cent after GDP data was released Friday morning.

The GDP growth of 3.7 per cent handily beat economists’ forecast of 3 per cent and the BoC’s estimate of 2.3 per cent. The rebound was driven by the fastest quarterly increase in exports since 2014 at 13.4 per cent annualized and helped along by a 4 per cent decrease in imports. However, consumer spending stalled and business investment contracted, casting a shadow on the domestic economy.

Most economists expect a rate hold at 1.75 per cent with a dovish statement from the Bank on Wednesday.

The Bank of Canada has said global trade wars are a major risk facing our economy and if anything those tensions have escalated over the past month.

Bank of America Merrill Lynch has changed its outlook from no cuts this year, to a cut on Oct. 30 and another in January.

“The global economy is decelerating and the ongoing U.S.-China trade war means it can decelerate even more, creating sizeable downside risks to Canadian economic activity,” said BofA Merrill Lynch Global Research.

Capital Economics also predicts a cut in October, and then two more in the first quarter of 2020, bringing the Bank’s rate down to 1%.

Stephen Brown, senior Canada economist at Capital Economics, expects a slowdown in GDP growth to 1.5 per cent in the third quarter of this year and just 1 per cent in the fourth.

“With the Bank likely to be focused on the downside risks from the further escalation of the U.S.-China trade war this month, we expect it to present a dovish message at its meeting next week,” writes Brown in the Capital Economics report.

CIBC’s call is the Bank waits until next year, but adds that “how policymakers interpret the weak spots and the global backdrop in next week’s statement will be a key watchpoint.”

RBC’s current prediction is a rate cut in January, with the proviso that the chances of it being earlier are increasing.

“For trade, it’s hard not to think the best is behind us — slowing global growth and trade flows and a softer U.S. industrial sector will make it hard for Canadian exporters to match recent gains,” say Nathan Janzen and Josh Nye, senior economists for RBC Economics Research.

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