CAD Drops as Bank of Canada Flags Concerns Over Trade Wars

Andrew Cummings
July 10, 2019

Don't expect any major - or even minor - change to interest rates when the Bank of Canada hands down its monthly monetary verdict later today.

"Recent data show the Canadian economy is returning to potential growth", the Bank of Canada said in a statement.

Today, Fed Chairman Jerome Powell bolstered expectations of a cut later this month when he testified that concerns about trade policy and a weak global economy "continue to weigh on the USA economic outlook". "Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate".

The Bank of Canada, which was widely expected to stand pat Wednesday, said it will continue to monitor data ahead of future decisions with a particular focus on developments in the energy sector and the effects of global trade tensions. Fallout from the uncertain worldwide trade environment was also reflected in the bank's updated economic projections.

Ongoing concerns about shrinking USA crude inventories combined with the latest extension by Russian Federation and the Organization of the Petroleum Exporting Countries to production cuts are outweighing worries about a global growth slowdown due to the U.S./China trade dispute. -China fight, in particular - that have rippled through the world's economy. That conflict is "curbing manufacturing activity and business investment and pushing down commodity prices", the bank said in a statement accompanying its rate decision.

The wider trade-related fights and, in some cases, direct actions are having an impact on Canada. These include new Chinese trade restrictions on Canadian agricultural goods, the bank said.

The central bank's projection for second-quarter domestic growth was at the low end of the range of 2.25% to 3% forecast by analysts.

The Bank of Canada's policymakers are widely expected to hold the trend-setting rate steady as Canada exits a sharp slowdown that almost brought the economy to a halt at the start of the year.

At the same time, the central bank said some of the recent pick-up will be temporary, and growth will decelerate in the third quarter. The immediate rebound has been stronger than expected, with the Bank of Canada revising up its growth projections for the second quarter to an annualized 2.3%.

A rate cut could also stoke housing market activity, according to Robert Colangelo, senior vice-president of Canadian banking financial institutions at ratings-agency DBRS, something that would work in the banks' favour.

Canadian banks rode a wave of hobby-rate hikes to bigger income in 2017 and 2018, in half because of the beneficial properties in earn hobby income, generated by the spread between the larger rates they charge for loans and the decrease rates they pay out on customer deposits. A sharp drop in oil prices in late 2018 prompted the bank to hit pause and it hasn't raised the rate since last October.

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