‘Persistent slack’ has BoC on hold

TORONTO • The Bank of Canada is holding its benchmark overnight interest rate at 0.5 per cent as it says Canada faces “persistent economic slack.”

The decision to hold rates was hardly a surprise. Ahead of Wednesday’s decision, 20 economists and analysts surveyed by Bloomberg News unanimously predicted Canada’s central bank would not change its trendsetting interest rate.

Canada experienced a surprising jump in inflation in January, but the Bank of Canada attributes this to the short-term impact of new carbon pricing measures that are in effect in Ontario and Alberta.

Take that temporary blip out of the mix, and the central bank said it continues to see “material excess capacity in the economy.”

The bank’s last interest rate decision, released Jan. 18, made note of global uncertainty.

Bank of Canada Governor Stephen Poloz told reporters at the time that enough potential downside risks were present in the economy for a future rate cut to be “on the table.”

Some Canadian economic data have improved since then, but the brief statement accompanying Wednesday’s decision is unlikely to spark any expectation the bank will hike rates soon.

“Today’s statement provides further confirmation of our view that the Bank of Canada will not be taking its foot off the accelerator,” said Brian DePratto, senior economist with TD Economics. “Over the near term, given the still significant economic uncertainties, particularly beyond Canada’s borders, we continue to see the risks to monetary policy as tilted toward further easing.”

Benjamin Reitzes, senior economist with BMO Capital Markets, noted that the central bank’s announcement might be the shortest policy statement in its history. And for what it’s worth, Wednesday’s statement was 255 words long, down from 417 words on Jan. 18. Reitzes described Wednesday’s statement as a placeholder until the next Monetary Policy Report on April 12.

“They remain firmly on hold, and have opted to remain focused on the negatives, while largely overlooking the recent string of better data,” Reitzes said. “The BoC’s dovish skew is intended to keep Canadian yields and the loonie under pressure. However, if the data continue to be positive, they won’t be able to deny the obvious for much longer.”

On Thursday, Statistics Canada will release data on the country’s 2016 fourthquarter gross domestic product. The central bank said Wednesday that recent consumption and housing indicators suggest the Q4 GDP number will show Canada’s economy grew slightly stronger than expected. But the bank also noted Canadian exports continue to face “competitiveness challenges” and have yet to pick up steam. Economic gains have yet to translate into broadbased employment growth.

“While there have been recent gains in employment, subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States,” the bank said.

The Bank of Canada’s next interest-rate decision will be released Apr. 12. It will also release its latest Monetary Policy Report, which will update the outlook for the economy, inflation and risks.