Bank of Canada holds key in­ter­est rate at 1%

An­a­lysts fore­cast more cau­tion amid slow­ing econ­omy, global un­cer­tainty

Ottawa Citizen - - FP - JESSE SNYDER js­ny­der@na­tion­al­ Fi­nan­cial Post

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 the fed­eral gov­ern­ment’s longde­layed 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 very 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 over-tight­en­ing by the BoC rep­re­sent­ing key down­side risks,” Shailesh Ksha­triya, a Toronto-based an­a­lyst at Rus­sell, 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.

Poloz will speak in Toronto next Thurs­day, where he will ad­dress some of the ma­jor risks to the Cana­dian econ­omy.

The next rate de­ci­sion is sched­uled for Jan. 17.

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