The third-quarter Business Outlook Survey revealed a rebound in firms’ investment intentions, which is consistent with machinery and equipment investment growth remaining close to 10% y/y. Moreover, the survey was carried out before the US and Canada concluded a new trade agreement at the start of this month, which could give investment a further boost. Higher investment intentions support our view that the Bank of Canada will follow a rate rise this week with another as soon as January, taking the policy rate to 2%. However, with firms now planning their 2019 capital expenditures, the recent slump in Canadian oil prices could hold back investment in the energy sector. Furthermore, even if machinery and equipment growth remains strong, it is likely to be offset by a sharp decline in residential investment, which we think will cause the Bank to move to the side-lines once the policy rate reaches 2%.
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