Bank of Canada holds rates
Poloz suggests more hikes likely at more cautious pace
ANDY BLATCHFORD
OTTAWA — The Bank of Canada left its benchmark interest rate unchanged Wednesday following two straight hikes but suggested future increases are still likely, albeit at a more-gradual pace.
In its scheduled announcement, the central bank said it held off this time in part because it expects the recent strength of the Canadian dollar to slow the rise in the pace of inflation.
To make its case, the bank also pointed to the substantial, persistent unknowns around geopolitical developments as well as U.S.-related fiscal and trade policies, such as the renegotiation of the North American Free Trade Agreement.
Governor Stephen Poloz has introduced two rate hikes since July — at consecutive policy meetings — in response to the economy’s impressive run over the last four quarters. The increases removed the two rate cuts introduced in 2015 as insurance following the collapse in oil prices.
The bank suggested Wednesday that it will stick to its rate-hiking trajectory, although at perhaps a moretentative pace.
“While less monetary policy stimulus will likely be required over time, governing council will be cautious in making future adjustments to the policy rate,” the bank said in a statement.
The bank stressed it will pay particular attention to incoming data to assess four areas: The unfolding impact of higher interest rates on indebted households, the evolution of the economy’s capacity, wage growth and inflation. Its next rate announcement is set for Dec. 6.
Later Wednesday, Poloz told reporters that almost any departure from the bank’s projections on these four issues would be fodder for deeper discussion about the trendsetting rate.
“We must be open. We can be surprised in either direction relative to our forecast,” Poloz said. “But we need to be extremely interpretive of those movements.”
Poloz reiterated his recent comments that each policy meeting is “live.”
The central bank also released updated projections Wednesday that forecast economic growth to moderate after Canada’s powerful performance, particularly since the start of the year.
It now expects real gross domestic product to slow from its robust annual pace of 3.1 per cent this year to 2.1 per cent in 2018 and 1.5 per cent in 2019.
The economy expanded at an annual rate of 3.7 per cent in the first three months of 2017 and 4.5 per cent in the second quarter. The bank’s latest outlook now predicts real GDP to grow at an annual rate of 1.8 per cent in the third quarter and 2.5 per cent in the final three months of 2017.
“Real GDP growth is expected to moderate to a still-solid pace close to two per cent ... over the second half of the year,” the bank said.
The bank forecasts declining contributions from residential investmentandconsumption,whichlargely fuelled Canada’s recent growth spurt. These changes will largely be consequences of higher borrowing rates, higher household indebtedness and policy measures aimed at cooling hot real estate markets, the report said.
The bank provided an estimate for the economic impact of incoming guidelines to reinforce mortgage underwriting practices, which were announced recently by the Office of the Superintendent of Financial Institutions. The changes, which will take effect next year, are expected to trim 0.2 per cent from GDP by the end of 2019, the bank said.
Moving forward, the bank said economic activity will advance on a “more-sustainable” trajectory led by rising foreign demand, recent increases in commodity prices, stilllow borrowing rates and government infrastructure spending. It also projects steady growth in business investment, which rebounded in early 2017.