The Bank of Canada is holding rates steady at 1.75 per cent. This is the fifth straight time that the central bank has held rates at this level. It has not raised or cut the rate since October 2018.
In a statement released after the announcement, the Bank of Canada points to strong job growth as an indicator that the economy is doing better. They say this “growth suggests that businesses see the weakness in the past two quarters as temporary.” Recent data support a pickup in both consumer spending and exports.
The Bank says recent Canadian economic data are in line with the projections that they had made in their April Monetary Policy report. There is now evidence, the Bank says, that the slowdown in the last quarter of 2018 has been followed by a pickup in the second quarter. Just as they had predicted. In the last three months of 2018 GDP data revealed Canada’s economy practically came to a halt.
Inflation is also in check at close to two per cent. The Bank expects CPI inflation to remain there.
Oil, which suffered the worst monthly drop in prices in two years in October, has seen a gradual recovery. Production of oil is up since then and so is the price of crude. Canada is an oil producing nation and is adversely affected by low oil prices, so this pickup is a major positive for Canada’s economy.
After a slowdown in real estate activity across the country, due to higher interest rates and new tougher mortgage rules that were brought in January 2018, indicators now point to a more stable market. The Bank adds that we will continue to see weakness in some sectors, but overall the housing market is stable.
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Global economic pressure remains a concern at the Bank of Canada. Again they point to trade conflicts, mainly between China and the U.S. as creating uncertainty in global trade relationships going forward.
On top of this, Canada is caught up in a geopolitical argument between the U.S. and China. After Canada arrested Huawei Technologies executive Meng Wanzhou on the request of a U.S. warrant alleging fraud. Canada says it has been punished by China with trade restrictions on our products and a total ban on Canadian canola oil.
China stopped buying canola oil from Canada earlier this year, claiming the oil was contaminated. All inspections made after of Canadian canola oil farms and factories has not supported this claim. China is the biggest consumer of Canadian canola oil, close to 40 per cent of the product was sold to China in 2018. According to Statistics Canada canola oil contributes more than $26 billion a year to the Canadian economy.
On an optimistic note the Bank says “The removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA (Canada United States Mexico Agreement) will have positive implications for Canadian exports and investment.”
In a note published after the rate announcement, TD Bank Senior Economist Brian DePratto, called the central bank’s decision to hold rates “business as usual.”
He predicts the chance of rate cut is off the table.
“Overall, today’s short statement appears to have been built with tempering market expectations in mind. Carefully balancing near-term positives with longer-term risks and maintaining data dependency suggests that markets may be getting ahead of themselves in skewing the odds towards a rate cut later this year.” DePratto writes. “It seems that we’ll need to see a deterioration in the economic data to spur easing, which, for the time being, is not in the cards – neither in the Bank’s view, nor ours.”
The TD Bank Senior economist says the only “wild card,” is Friday’s GDP report. “But so far it appears that economic growth in the first half of the year is likely to meet the Bank of Canada’s expectations.”
Going forward the Bank says it will remain “data dependent,” on any future policy decisions. They are especially paying close attention to developments in household spending, oil markets and the global trade environment.
The Bank’s decision to hold rates is good news for anyone worried about servicing their variable rate loans. But it is also a good reminder to take advantage of low borrowing costs, by paying down debt now before rates go higher.
The next scheduled date for announcing the overnight rate target is July 10, 2019.