BANK OF CANADA SIGNALS RATE CAUTION FOR 2018.

HOLDS ON RATES IN FINAL DECISION OF YEAR, CITES ‘CONSIDERABLE UNCERTAINTY’ AHEAD

OTTAWA • The Bank of Canada on Wednesday maintained its key interest rate at one per cent, confirming expectations that the bank would hold off on further rate hikes amid slackening economic data.

The decision comes as Governor Stephen Poloz has struck a decidedly more cautious tone in recent months, saying future interest rate decisions would be data-driven rather than prescribed. Despite roaring economic growth in the first half of 2017, the bank has been cautious about slowing exports, wage growth and inflation levels that remain below its two-per-cent target.

In a press release Wednesday, the bank also pointed to souring negotiations over the North American Free Trade Agreement and other ongoing trade deals, saying the global economy “remains subject to considerable uncertainty, notably about geopolitical developments and trade policies.”

Even so, economic growth in the third quarter outpaced the bank’s expectations, partly as a result of higher oil prices and improved growth in developing nations. Business investment has also improved over the year, and Ottawa’s long-delayed infrastructure spending program began to show results in third-quarter data, the BoC said.

Most analysts expected the bank to maintain its current rate Wednesday. Canadian Imperial Bank of Commerce doesn’t see another rate hike until April 2018, largely in line with other analysts’ projections. CIBC said Wednesday that “while higher interest rates will likely be required over time, Governing Council will continue to be cautious” about further rate hikes.

Bank of Montreal chief economist Douglas Porter said that bank appears patient, with little appetite to move in January despite the near-record low jobless rate.

“They will be minding NAFTA progress (or otherwise), any early impacts from the OSFI rule change at the start of 2018, and how Q4 growth, wages and prices shape up. We continue to have the March meeting circled for the next rate hike (with two more in H2 next year), but will be like the Bank in watching NAFTA and housing in particular.”

Analysts have gradually pared back their expectations for hikes in 2018.

“Further rate hikes are still coming, but even if they move ahead of our April target, that needn’t mean that we’ll see more than 50 basis points in total next year, given the bank’s emphasis on being cautious on that front,” CIBC Capital Markets chief economist Avery Shenfeld wrote in a note Wednesday.

Meanwhile, analysts at Russell Investments Canada Ltd. expect the Bank of Canada to raise rates just once in 2018 as economic growth tapers off. The firm expects moderate growth over the next year, albeit at a “lower gear” compared to 2017, and warns that continued monetary policy in Canada could restrict growth prospects.

“The prospect of recession in Canada remains at bay for 2018, but Canadian investors should expect a bumpy ride and a fair bit of uncertainty with the housing market, NAFTA trade discussions and the potential for overtightening by the BoC representing key downside risks,” Shailesh Kshatriya, a Toronto-based analyst at Russel, said in the firm’s global outlook Wednesday.

The bank raised rates for the first time in seven years, first in July and again in September. Canada’s economic growth has outpaced any other G7 country in 2017, growing well over three per cent in the first half of the year.

The next rate decision is scheduled for Jan. 17.