Bank of Canada says no rate cut on the table

OTTAWA The head of the Bank of Canada said an interest rate cut was not on the table during the central bank’s latest policy decision, but also warned of persistent risks that suggest it will not hike any time soon.

The central bank held its trendsetting rate unchanged on Wednesday following an early2017 run of data that exceeded its expectations.

“Given the data we’ve seen in the last few months, I can say quite clearly, ‘No, a rate cut was not on the table at this time,’” bank governor Stephen Poloz told a news conference in Ottawa.

“As we’ve outlined, I think pretty bluntly, that given the circumstances we see, we’re decidedly neutral.”

In January, Poloz had left the door open to a possible rate cut, citing the uncertainty surrounding the U.S. trade agenda and the lacklustre state of the Canadian economy.

But following the string of solid numbers, the bank acknowledged the improvements Wednesday.

It’s now predicting real gross domestic product to expand at an annual rate of 2.6 per cent this year, up from its January forecast of 2.1 per cent.

A change in the bank’s outlook also suggested a rate hike could come sooner than the market had expected earlier this year. The positive momentum prompted the Bank of Canada to speed up its timetable for the economy to return to full capacity, which is now projected for early next year.

“The data have been good the last few months and we’re really glad of it,” Poloz said. “It’s much nicer than having serial disappointment to report on.”

The bank, however, also made a point of reiterating stillpresent downside risks highlighted by the U.S. uncertainty.

In holding the rate at 0.5 per cent, it said the potentially adverse effects of the U.S. economic agenda continued to weigh on its outlook.

It also said the economy has yet to show it can stick to the higher growth trajectory.

The recent improvement, the bank said, was largely fuelled by unexpectedly robust residential investment as well as temporary factors such as the resumption of expenditures in the energy sector and the consumer-spending lift from bigger child-benefit cheques.

The bank noted export growth was uneven and that there were signs of weakness in areas like business investment and within underlying employment indicators such as hours worked and wages.

TD Bank senior economist Brian DePratto said it’s a “little difficult to square” the bank’s stronger projections, such as its bigger growth forecast, with the more-downbeat tone of its accompanying statement.

“(It’s) an upgraded forecast and then throwing a little bit of water on that at the same time,” said DePratto. “I think markets are probably going to be a little bit skeptical.”

Beyond 2017, the bank predicted growth will moderate and become more balanced.

It anticipates greater contributions from exports and business investment. The bank also expects the powerful pace of household spending — particularly in residential investment — to eventually slow next year as debt levels and borrowing costs rise.