B of C holds rate at 1.5 per cent

The Bank of Canada’s decision to leave its interest rate unchanged Wednesday could be just a brief pause that comes as it carefully follows the unpredictable twists in the country’s trade talks with the United States.

The central bank kept its benchmark at 1.5 per cent, but many experts predict another increase could arrive as early as next month.

In a statement Wednesday, the Bank of Canada said more hikes should be expected thanks to encouraging numbers for business investment, exports and evidence that households are adjusting to pricier borrowing costs.

The bank, however, also made a point of saying it’s closely watching the renegotiation of the North American Free Trade Agreement and other trade policy developments, which could have negative impacts on the Canadian economy. It’s particularly concerned with the potential implications for inflation.

Frances Donald, head of macroeconomic strategy for Manulife Asset Management, said the Bank of Canada’s explicit mention of NAFTA in Wednesday’s statement suggests the negotiations have become even more important around the governing council’s table.

“They’re sending a message that everything looks as planned... What that says to me is that an October rate hike is still certainly in play.”

However, she said the NAFTA reference gives the Bank of Canada options to possibly stay on hold next month, particularly if trade talks — and the outlooks for the economy and inflation — deteriorate.

Governor Stephen Poloz, she added, has been “fairly agnostic” on the outlook for NAFTA. She said he’s pointed to potential negatives as well as positives, while stressing everything is hypothetical until something is decided.