Bank Holds Benchmark Rate: Hints Rates Will Remain Longer Than Expected

Bank of Canada Announcement

As most economists had expected the Bank of Canada has held its overnight lending rate steady at 1.75 per cent. Industry watchers had predicted,  because of a sharp decrease in GDP in the fourth quarter of 2018 coupled with slower global growth, the chance of the BoC raising rates this time were slim.

In a statement released after the announcement the central bank says “Consumer spending and the housing market were soft, despite strong growth in employment and labour income.” Businesses investment is also down and the BoC is now predicting a weaker than expected 2019. All of this is weighed into the decision for the Bank to leave rates unchanged.

Rates steady for now

In 2018 the Bank was hinting at several rates hikes in 2019. But now that tone has changed. The Bank says “Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.” The BoC adds that with “increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.”

In a note to journalists and market watchers after the announcement, BMO economist Benjamin Reitzes says his key takeaway is the BoC is taking a more dovish tone. He says “It’s clear that while the hiking bias was left in, any potential move higher in rates is a long time away. Indeed, any further deterioration in the backdrop will prompt discussion of rate cuts to heat up further.”

Trade Relations

Although they are improving trade relations between the U.S. and China remain a major threat to the global economy including to Canada’s economic growth.  The BoC state that “recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR).” The BoC says despite some improvement in talks, “trade tensions and uncertainty are weighing heavily on confidence and economic activity.” They point out that there is progress in the U.S. China Trade talks and that is helping market sentiment and contributing to firmer commodity prices.

Inflation and growth

After growing at a pace of 1.8 per cent in 2018 the central bank is now expected weaker growth in the first half of 2019 than previously thought. Part of this has to do with a sharp decline in oil prices in the fall of 2018.

The bright spot is core inflation remains close to two per cent. The central bank expects this to remain for 2019. ‘Reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.’ The Bank’s mandate is to keep inflation in check normally close to two per cent.

Sigh of relief

Canadians still remain in near record levels of debt. Latest data from Statistic Canada shows, Canadians owe $1.78 for every $1 we make. This means many Canadians carrying a variable rate loan can feel more comfortable knowing that more than likely their cost of borrowing will not be going up, in the next few months at least. In the meantime those in debt should not take on any new debt and make changes to pay more to prepare for higher rates when they finally come.

According to the BoC the next scheduled date for announcing the overnight rate target is April 24, 2019. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

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