Bank of Canada upbeat as key rate remains the same

The Bank of Canada is feeling pretty good about the economic outlook, all things considered. Policy-makers left the benchmark interest rate unchanged at 1.75 per cent on Wednesday, noting that the escalation of Donald Trump’s trade war with China “is heightening uncertainty about economic prospects.”

That was expected, as economic growth essentially stalled at the end of 2018 and was struggling to rebound early in the new year. An expression of worry about a new round of tit-for-tat tariffs between the world’s largest economies also was anticipated.

Canada’s non-energy exports already were weak. Anything that hurts global demand, or makes it more difficult for Canada’s relatively uncompetitive exporters to find new markets, would deny the economy a lift from international sales. The International Monetary Fund estimates the row between the U.S and China will erase 0.3 per cent from global gross domestic product in the short term.

“The degree of accommodation being provided by the current policy rate remains appropriate,” the Bank of Canada said in a statement.

Aside from trade, policy-makers say the world is unfolding much as they expected last month, when they slashed their forecast for economic growth in the first quarter to an annual rate of 0.3 per cent, while predicting a rebound to a rate of 1.3 per cent in the current quarter. The central bank said there is “accumulating evidence” that the slump was temporary, just as it thought.

That note of assurance restores a bit of the swagger the Bank of Canada lost when it failed to anticipate the severity of last year’s slowdown.

Bank of Canada governor Stephen Poloz and his deputies on the Governing Council were gradually taking interest rates higher last year when the economy hit a wall.

Oil and real estate prices plunged in the fourth quarter and household spending sputtered. Policy-makers retreated to the sidelines, unsure if the economy was ready for higher interest rates.

They remain unsure, as there is no indication in the new statement that policy-makers are ready to resume their path back to a more normal interest-rate setting. At the same time, there is nothing that indicates that an interest-rate cut was on the table over the past couple of weeks as the Governing Council assessed the outlook. That could surprise some people. Prices of assets geared to short-term interest rates suggest that some investors are betting that economic conditions will force interest rates lower this year. The central bank doesn’t appear to see things going that way.

“The bank isn’t moving,” Darcy Briggs, a portfolio manager at Franklin Templeton Investments, said in a telephone interview from Calgary. “The Canadian outlook is mediocre at best.”

Poloz said in April that the unusually severe winter appeared to have disrupted commerce, but that he couldn’t be sure until he saw more data. The information since then has been mostly positive. Factory sales jumped 2.1 per cent in March from February after stalling the previous month, while new orders increased by 1.5 per cent, Statistics Canada reported on May 16. Retail sales also recovered in March, climbing 1.1 per cent, the second-consecutive monthly increase.

The Bank of Canada said the oil sector is “beginning” to recover and that weakness in the housing appears to be isolated to a few regions.

Evidence indicates that consumer spending and exports have picked up, and “overall business investment has firmed,” the statement said.

And then there are those impressive hiring numbers. Employers created more than 100,000 new positions in April, the most on record.

The data are volatile, but the central bank has concluded that companies wouldn’t be taking on new workers at this rate if the economy was going off the rails.

“Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary,” the statement said.

The U.S.-China trade war makes forecasting with confidence impossible because the rules on which standard economic models and theories are built don’t apply to Trump and China’s form of state-directed capitalism.

So orders will be determined by geopolitical considerations rather than factors such as quality and price, according to Angelo Katsoras, geopolitical analyst at National Bank.

International companies may need multiple supply chains to avoid the web of tariffs and sanctions that the U.S. and China have deployed.

And a settlement wouldn’t be an automatic gain for a country such as Canada, which has benefited to some degree from China’s tariffs on American farm goods. Any agreement likely would involve U.S. agriculture exports, which could hurt Canadian farmers.

The Bank of Canada reiterated that interest rates will be guided by data, especially indicators that shed light on what’s going on with household spending, oil prices, and trade policy.

Poloz and his deputies have seen enough to assure themselves that they aren’t fighting a recession. But they will proceed extremely cautiously because Trump and China still could trigger one.