Bank of Canada still wary of growth path
But governor ‘glad’ of good data in recent months
The head of the Bank of Canada said an interestrate 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 increase any time soon.
The central bank held its trendsetting rate unchanged on Wednesday following an early-2017 run of data that exceeded its expectations.
“In this context, 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 reporters 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 2018.
“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 still-present downside risks — highlighted by the U.S. uncertainty.
In holding the rate at 0.5 per cent, it said the potentially adverse impacts 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.
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.
For this year, however, the bank believes hot housing markets in cities like Toronto will help residential investment deliver a “significantly higher” contribution to Canada’s growth performance than it had anticipated in January.
The bank also warned that climbing real estate prices in the Toronto area appear to now be driven, in part, by speculation.
The future, however, looks murky.
Economic growth, it said, is now expected to expand by 1.9 per cent in 2018, down from the bank’s
January forecast of 2.1 per cent, and to hit 1.8 per cent in 2019.
In its quarterly monetary policy report, which was also released Wednesday, the bank said its outlook once again factored in some of the effects caused by ongoing unknowns around the potential introduction of U.S. changes, especially in relation to trade and fiscal policies.
With the timing of any U.S. policy changes still unclear, the bank said its base-case projection includes only the estimated impact of “prolonged and elevated trade policy uncertainty” on trade and investment in Canada and internationally.
Changes under discussion in the U.S. include the renegotiation of the North American Free Trade Agreement, corporate and personal tax cuts, regulatory easing and a potential border tariff.
The bank said Canadian firms “remain wary” over potential U.S.-related developments that could increase protectionism and reduce competitiveness in the event of corporate tax reductions and regulatory changes.
Due to an expected additional drag on global investment connected to U.S. trade policy uncertainty, the report included slightly lower projections for export growth in 2017 and 2018 compared to the bank’s earlier predictions.
The bank also pointed to the U.S. trade-policy unknowns, and the fact it now expects them to drag on longer than expected, in its decision to revise down its prediction for business investment in 2017.