Bank of Canada expected to hold interest rates in today's policy decision

Cornelia Mascio
Gennaio 13, 2019

-China trade war is weighing on global demand and commodity prices, Canada's central bank made a decision to keep its key interest rate unchanged today. The Canadian economy has "been performing well overall", however, the central bank is also anxious about the below expected consumer spending and housing investment.

The bank last raised interest rates at its October meeting, for the third hike in 2018.

The bank is now projecting growth to be just 1.7 per cent this year, down from its October forecast of 2.1 per cent - but looking ahead it anticipates fresh momentum starting in the second quarter of 2019 and strong numbers in 2020.

The bank reiterated Wednesday that more rate increases will still be necessary, but this time it inserted the phrase "over time" to its statement. However, as Poloz isn't expected to move the rate, the bigger focus will be on his forecast for Canada's economy in the coming months. In 2015 and 2016, as the Bank of Canada cut already low interest rates twice to support the economy in the face of the severe oil market collapse of that time, households accounted for essentially all of the country's GDP growth.

"Weighing all of these factors, Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target", the central bank said.

"It's meant to inject a degree of ambiguity into the timing of this because obviously we're dealing with developments over the last few months that constitute a delay", Poloz said when pressed for an explanation. The ideal storm of falling oil prices, a dovish Bank of Canada, a stock market meltdown and a somewhat hawkish U.S. Federal Reserve that knocked the loonie for a loop in December, is just a bad memory today.

The World Bank expects oil prices to average $67 a barrel this year and next, down $2 compared to projections from June last year, the bank said in its Global Economic Prospects report, in which it also revised down its global growth projections amid "darkening skies" for the global economy. That trend looks likely to deepen as the impact of the oil decline ripples through the economy. That's a shift from December, when Poloz described housing as "stabilizing".

There are too many unknowns about how the housing market will react to the cocktail of measures working to slow it down, said George Pearkes, chief macro strategist at Bespoke Investment Group. Extended housing uncertainty is yet another reason for consumers to run for cover.

Brian DePratto, senior economist at TD Bank, said the central bank's decision came as no surprise. Home sales in the Toronto region fell 16 per cent in 2018, while in Vancouver they plunged 32 per cent. Things changed on January 4 when Powell appeared to reverse himself and suggested that the Fed could afford to be patient with further rate hikes.

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