Bank of Canada Holds; We May Be Here a While

Andrew Cummings
March 10, 2019

According to the Bank of Canada, there was a sharp drop in household spending as well as weak numbers for exports and investment in oil-producing provinces over the final three months of 2018.

"It's primarily being driven off of the fact that we had weak Canadian GDP numbers come out and that was followed by the Bank of Canada using statements such as the path of future rates is now more uncertain", he said in an interview.

"Although we figured the economy was in for a detour at the end of past year, that detour may wind up being longer than we had expected", she told a business audience in Hamilton, Ontario. Now, the interest rate outlook is even more opaque than in January when the BoC made an effort to inject some ambiguity into the timing of future rate hikes.

It's a mixed picture, and we need more time and more data to better understand what's going on.

But governing council members had not been anticipating Statistics Canada's economic report last Friday to show a sudden deceleration in other categories as well, Patterson said.

The central bank's trend-setting interest rate is staying at 1.75 per cent for a third-straight policy announcement - a stretch that comes after governor Stephen Poloz introduced five rate hikes between mid-2017 and last fall. Before Wednesday's interest rate decision, the market had been pricing in a small chance of a hike. That situation prompted the central bank to back away from interest-rate increases at the end of a year ago.

"We change our call" to no hikes in 2019 from our previous expectation of one hike in the December quarter, Mr Capistran said.

"Consumer spending and the housing market were soft, despite strong growth in employment and labour income", the statement said.

Heading into the decision Wednesday, the Bank of Canada was widely expected to leave the key interest rate untouched.

While the central bank won't release new economic forecasts Wednesday and there's no press conference accompanying the decision, Deputy Governor Lynn Patterson will give an economic progress report Thursday that will provide some insight into the rate deliberations and how the central bank is interpreting the latest data. Trade tensions and uncertainty continue to dampen these components of growth.

The Canadian dollar swooned on the news, falling almost half a cent minutes following the bank's announcement. The bank, however, noted that global economic prospects would improve if ongoing trade conflicts are resolved. Market sentiment, as gauged by stock markets, may be more enthusiastic than economic performance due to the anticipation of a resolution of the U.S.

The bank's measures of core inflation remain stable and very close to the 2 percent target even as official inflation fell to 1.4 percent in January because of lower gas prices.

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