Bank of Canada keeps interest rate unchanged

13 Janvier, 2019, 03:10 | Auteur: Auguste Feret
  • Bank of Canada Governor Stephen

The Bank of Canada's "entire chop" to projected 2019 growth - from 2.1 per cent to 1.7 per cent - is attributable to lower domestic demand, Bank of Montreal's Chief Economist Douglas Porter said Wednesday. The Bank of Canada has estimated it will no longer need to hike the rate once it reaches a "neutral" level of between 2.5 and 3.5 per cent - a destination range Poloz said is under review and could be updated in April.

With global economic growth projected to slow down in 2019 and increasing signs that the U.S.

"This also comes as softening commodity prices, rising market volatility and dropping global manufacturing indices suggest that external conditions are worsening".

Global benchmark prices for oil have been about 25 per cent lower than assumed in the October Monetary Policy Report (MPR).

The poll of more than 50 currency analysts predicted the loonie, sensitive to moves in currency prices, would strengthen to 1.28 to the US dollar in 12 months, or 78.13 USA cents, up 3.6 percent from Tuesday's close of 1.3273. These worries among market participants have also been reflected in bond and equity markets.

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The recent drop in crude prices will have a "material impact" on the Canadian outlook, the bank said. The Canadian economy has "been performing well overall", however, the central bank is also anxious about the below expected consumer spending and housing investment.

"Our base case is that the economy will grow above potential this year and next. Looking ahead, exports and non-energy investment are projected to grow solidly, supported by foreign demand, the CUSMA, the lower Canadian dollar, and federal tax measures targeted at investment". For this reason we continue to pencil in another rate hike this spring. Household spending will be dampened further by slow growth in oil-producing provinces.

"The Bank of Canada has hiked and will continue to hike into a more pronounced slowdown than the USA", said Frances Donald, head of macroeconomic strategy at Manulife Asset Management.

The central bank revised down its expectations for the sector, which it now expects to shrink in 2019 after previously forecasting a small gain. As expected, CPI inflation eased to 1.7% in November, due to lower gasoline prices. Headline inflation is expected to remain below target in the near term before returning to 2 percent by the end of this year, with a similar rate likely in 2020. This means that as near-term shocks fade, the Canadian economy should get back on track, with some modest inflationary pressures to match. As these transitory effects unwind and excess capacity is absorbed, inflation will return to around the 2 per cent target by late 2019.

Governor Stephen Poloz has raised the benchmark five times since the summer of 2017 and he's instructed Canadians to prepare for an eventual era of three per cent interest rates.

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