The Bank of Canada is holding its benchmark interest rate steady at 0.5 per cent. The rate has been held there for more than a year. The Bank says there’s still too much uncertainty to raise rates – particularly due to the new U.S. president being sworn in this week.
Usually, the Bank of Canada’s interest rate announcements focus on specific domestic and global issues that back up the rate decision. But in Wednesday’s announcement, Bank of Canada Governor Stephen Poloz quickly pointed the cause of uncertainty squarely at the United States and soon-to-be president, Donald J. Trump. From trade, to inflation to steep corporate tax cuts in the U.S., Poloz says all of it is putting the Bank in a position to keep rates low.
Poloz did mention that while increased economic activity in the U.S. would give Canada an economic boost, it is not yet clear as to when that would happen.
Poloz said, “The uncertainty we face as forecasters and policy-makers remains undiminished.” He adds, “In our discussions, Governing Council was particularly concerned about the ramifications of U.S. trade policy, because it is so fundamental to the Canadian economy. But we cannot capture these in our projections because they are simply unknown at this point.”
Poloz also remains concerned about business investment in Canada, as Trump’s expected plans for protectionist policies could decrease trade activity here. He said corporate tax cuts in the U.S. could adversely affect Canadian export competitiveness. Even with our dollar being much lower, a company is less likely to come to Canada to have something made if the cost to manufacture drops in the U.S. This would mean less exports and investment in Canada – even less than we are currently seeing.
The Bank of Canada aims to keep inflation around two per cent, as it currently remains well below that level. And as such, the Loonie remains steady, meaning businesses can better predict their future costs and keep prices lower for consumers.
The last time the Bank cut its benchmark interest rate was in 2015. Since then, it has been holding the overnight rate at ½ a per cent.