The Bank of Canada has done the right thing with monetary policy in the face of deteriorating economic conditions, says BCA Resarch, but the central bank has more work ahead of it in the months ahead.

Last week unemployment data showed that the Canadian economy lost another 82,600 jobs in February (following 129,000 jobs lost in January), and the unemployment rate rose to a six-year high of 7.7%, BCA observes in a research note. “Worryingly, full-time positions account for 100% of the 295,300 positions shed since October,” it adds.

“While the starting point for the Canadian economy may have been superior to most of its G7 peers, the collapse in international activity has materially weakened the country’s growth profile and risks to the outlook remain negative,” BCA warns.

“Already, GDP contracted in the fourth quarter last year, the external current account balance fell into deficit for the first time in a decade and leading growth indicators and business surveys warn that the economic backdrop is still deteriorating. In turn, the combination of falling house prices and rising unemployment will continue to weigh on consumer sentiment and further undermine retail spending (which collapsed late last year).”

As a result, BCA concludes that additional fiscal and credit stimulus will be needed in the coming months. “However, we expect the ride to remain bumpy and believe it is prudent to shift to overweight Canadian government bonds within a globally hedged fixed income portfolio. Investors may also consider buying provincials and high-quality Canadian corporate bonds in preparation for credit easing by the Bank of Canada,” it says.

IE