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Bank of Canada holds interest rates steady

The Bank of Canada is staying the course on interest rates, holding the overnight rate steady at 1.75 per cent.

Central bank holds the overnight rate steady at 1.75%

Governor of the Bank of Canada, Stephen Poloz answers questions during a press conference, in London, U.K., November 5, 2018. The central bank announced Wednesday it is holding interest rates steady. (Peter Nicholls/Reuters)

The Bank of Canada is staying the course on interest rates, holding the overnight rate steady at 1.75 per cent.

The bank rate is two per cent and the deposit rate is 1.5 per cent.

In a statement about the decision, the bank said "the global economy is showing signs of stabilization, and some recent trade developments have been positive."

However, it also noted that geo-political issues have emerged "with tragic consequences," referencing the crash of flight PS752 in Iran, which ended the lives of 57 Canadians and many others with ties to Canada.

The bank said the Canadian economy has been strong but with mixed indicators since its last major update with October's Monetary Policy Report.

"The Bank now estimates growth of 0.3 percent in the fourth quarter of 2019 and 1.3 percent in the first quarter of 2020. Exports fell in late 2019, and business investment appears to have weakened after a strong third quarter." 

While some of the slowdown late last year is being chalked up to a strike at CN Rail and an outage at the Keystone pipeline, the central bank says the weaker figures could also signal that global uncertainty is affecting Canada more than previously predicted.

'Considerable uncertainty'

The picture the bank painted in its report Wednesday was a sharp contrast from its last look at the economy, when a degree of domestic resilience remained in spite of weaker data points outside Canada's borders.

There is "considerable uncertainty" about how long household spending may stay soft, the report said, as households are expected to be more cautious with their spending decisions and save more in the face of high levels of debt — all this despite a federal tax cut that kicked in on Jan. 1 and growth in wages.

James Marple, senior economist at TD Economics, said in a written statement that the rate decision was expected, but the dovish tone was not, indicating that "the data could be signaling something more pernicious than its baseline forecasts assume."

Marple's statement said the bank's announcement was consistent with TD's expectations that there will be a 25 basis point cut in the overnight rate later this year. 

"A softening economic outlook alongside tighter financial conditions is a recipe for pushing the Canadian economy further below potential and weakening inflation, conditions the Bank of Canada will not ignore, as it made obvious today."

The report said ratification of the new North American free trade deal — a top priority for the Trudeau Liberals now that the U.S. and Mexico have completed their processes — and a partial trade detente between the United States and China should help stoke economic fires in Canada.

Growth for 2021 is forecast at two per cent, up from the bank's October forecast of 1.8 per cent.

The outlook for the economy could change if the Trump administration follows through on threats to slap tariffs on France, Brazil and Argentina.

With files from Canadian Press

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