BOC: Officials Eyed Risks To Exporters; RBC Now Sees BOC Holding In March

The Summary of Deliberations from the Bank of Canada's Jan 29 meeting (link) offer a bit more colour on the decision to cut rates by 25bp to 3.00% and end QT. 

• Per our Policy team, BOC officials held lengthy discussions about potential losses of investment and consumer confidence if there is prolonged trade uncertainty, agreeing they can only do so much to shield against such a blow. US President Trump's early tariff threats influenced the decision to lower rates and the future path of monetary policy must weigh signs of domestic momentum against a trade war that would slash growth and boost prices.
• From the Summary of Deliberations: "Members were concerned that U.S. tariffs on Canadian exports would add significant pressures on Canadian exporters. Over time, this could lead to business closures and companies exiting the export sector...Even if no tariffs were imposed, a long period of uncertainty under the cloud of tariff threats would almost certainly damage business investment in Canada...companies were already re-evaluating their investment plans in the face of trade policy uncertainty. With significant tariffs, the risk of capital flight would increase."
• The accounts also spelled out a potential dilemma for the BOC in the event tariffs weaken the economy but related inflation persists: "“In the short run, monetary policy cannot lean against lower growth and higher inflation at the same time."
• OIS-implied pricing for March's meeting has faded a cut in the past week, going from a fully-priced 25bp cut at the Feb 3 close, to a little under 50/50 implied probability of a 25bp cut (was closer to 56% at Tuesday's close).
• While today's hawkish repricing was due mainly to knock-on effects from a strong US inflation report, it's also notable that RBC analysts said today they expect the BOC to hold in March ("In the January meeting when the overnight rate was cut by 25 bps, the BoC recognized that past rate cuts 'have started to boost the economy,' but that the labour market is still soft. Governor TIff Macklem didn’t commit to reacting during a protracted trade conflict. With the most damaging tariff scenarios not in our base-case and domestic conditions proving better than feared, we expect the BoC will skip a cut in March....but expect further reductions will still be needed later this year")