Canada maintains rate but drops reference to rate hikes

25th April 2019 Off By binary


Canada’s central bank left its benchmark target for the overnight unchanged for the fourth time in a row and turned even more dovish by dropping any references to the need for further rate hikes and signaling it may even consider cutting interest rates.
The Bank of Canada (BOC), which has maintained its key rate at 1.75 percent since October 2018 when it raised it for the 5th time since July 2017, said economic growth has slowed even more than it forecast in January and “an accommodative policy interest rate continues to be warranted.”
“We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive,” BOC said in its statement, adding it was keeping a close eye on household spending, oil markets and global trade policy to see how factors that are weighing on growth dissipate.
In January the BOC lowered its growth forecast and then in March it began its shift toward a more dovish policy stance – a shift also seen in the U.S. and Europe – by saying there was  increased uncertainty about the timing of further hikes in light of slowing economic growth.
“Ongoing uncertainty related to trade conflicts has undermined business sentiment and activity, contributing to a synchronous slowdown across many countries,” BOC said.
Canada’s economy slowed in the second half of last year and growth in the first half of this year is now expected to be even slower than anticipated in January as last year’s fall in oil prices and transportation limits had curbed investment and exports in the energy sector while investment and exports in other sectors had been affected by trade policy uncertainty and the global economic slowdown.
Gross domestic product growth in the fourth quarter of 2018 fell to only 0.1 percent from the third quarter for annual growth of 1.6 percent, down from 1.9 percent in the third quarter.
But GDP grew 0.3 percent in January from December after two straight months of decline and BOC expects growth to pick up in the second quarter, helped by the decision by major central banks to slow down the pace of monetary policy normalization, which has improved financial conditions and sentiment in financial markets.
In its latest monetary policy report, BOC lowered its forecast for 2019 economic growth to 1.2 percent from January’s forecast of 1.7 percent, and its 2018 estimate to 1.8 percent from 2.0 percent.
The forecast for 2020 was unchanged at 2.1 percent and for 2021 growth is seen at 2.0 percent.
Canada’s headline inflation rate has ticked up in the last three months to 1.9 percent in March along with core inflation, which also rose to 1.6 percent.
BOC raised its forecast for 2019 headline inflation to 1.9 percent from January’s 1.7 percent forecast and down from 2.3 percent in 2018. For 2020 and 2021 inflation is seen at BOC’s target of 2.0 percent.

The Bank of Canada released the following press release:

“The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.
Global economic growth has slowed by more than the Bank forecast in its January Monetary Policy Report (MPR). Ongoing uncertainty related to trade conflicts has undermined business sentiment and activity, contributing to a synchronous slowdown across many countries. In response, many central banks have signalled a slower pace of monetary policy normalization. Financial conditions and market sentiment have improved as a result, pushing up prices for oil and other commodities.
Global economic activity is expected to pick up during 2019 and average 3 ¼ per cent over the projection period, supported by accommodative financial conditions and as a number of temporary factors weighing on growth fade. This is roughly in line with the global economy’s potential and a modest downgrade to the Bank’s January projection.
In Canada, growth during the first half of 2019 is now expected to be slower than was anticipated in January. Last year’s oil price decline and ongoing transportation constraints have curbed investment and exports in the energy sector. Investment and exports outside the energy sector, meanwhile, have been negatively affected by trade policy uncertainty and the global slowdown. Weaker-than-anticipated housing and consumption also contributed to slower growth.
The Bank expects growth to pick up, starting in the second quarter of this year. Housing activity is expected to stabilize given continued population gains, the fading effects of past housing policy changes, and improved global financial conditions. Consumption will be underpinned by strong growth in employment income. Outside of the oil and gas sector, investment will be supported by high rates of capacity utilization and exports will expand with strengthening global demand.  Meanwhile, the contribution to growth from government spending has been revised down in light of Ontario’s new budget.
Overall, the Bank projects real GDP growth of 1.2 per cent in 2019 and around 2 per cent in 2020 and 2021. This forecast implies a modest widening of the output gap, which will be absorbed over the projection period.
CPI and measures of core inflation are all close to 2 per cent. CPI inflation will likely dip in the third quarter, largely because of the dynamics of gasoline prices, before returning to about 2 per cent by year end. Taking into account the effects of the new carbon pollution charge, as well as modest excess capacity, the Bank expects inflation to remain around 2 per cent through 2020 and 2021.
Given all of these developments, Governing Council judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.”


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