Bank of Canada holds interest rate as economy proves resilient

Andrew Cummings
December 5, 2019

Philip Lowe, the bank's governor, said "it was reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target", and that he was "prepared to ease monetary policy further if needed".

Mr. Lane argued that despite the Canadian economy's close ties to the USA, it often doesn't make sense for the Bank of Canada to match Fed rate moves - something that some critics have argued the Bank of Canada should be doing, to avoid too much divergence in the two countries' interest rates.

Earlier this week, the Reserve Bank of Australia, which dropped its policy rate three times between June and October, left borrowing costs unchanged, but not on a cheery note.

"The continuing trade disputes and associated uncertainties continue to weigh on global economic activity and remain the biggest source of risk for the outlook".

The Canadian dollar strengthened to a two-week high of C$1.3231 to the greenback, or 75.58 US cents.

Lane cited recent third-quarter economic data that while confirming a slowdown, also seem to show the weakening will be temporary.

Sal Guatieri, senior economist with BMO Capital Markets, said the bank appeared to be taking comfort from the rebound in business investment and steady growth in consumer spending.

Bank of Canada keeps rate at 1.75%.

CPI inflation in Canada remains at target, and measures of core inflation are around 2 percent, consistent with an economy operating near capacity.

"The world economy continues to be buffeted by trade conflict, and relations between the United States and China are on a roller coaster", he said.

"The bank must know something that everyone else in the markets doesn't in terms of risks to global trade policy that remain deeply unsettled, (the) risk to financial markets (and) US dollar funding pressures", he said by phone.

Gross domestic product in the third quarter increased at an annual rate of 1.3 per cent, an uninspiring result, but exactly the outcome that the Bank of Canada had predicted. But officials indicated they weren't quite ready to believe investment is as solid as the new numbers indicate. The Bank continues to monitor the evolution of financial vulnerabilities related to the household sector.

"It is because of this strength amid the turmoil that we say Canada is resilient, although it is not immune", Lane said, adding this strength is what is allowing the central bank to chart its own course on policy.

Mr. Lane said the central bank's economic outlook from its quarterly Monetary Policy Report in October "remains on track". The currency extended gains on Thursday, and was up 0.2% to C$1.3177 per US dollar at 11:25 a.m. Toronto time, as investors pared bets on a rate cut.

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