Bank of Canada holds rates steady, remains ‘cautious’ on future hikesApril 18, 2018
The Bank of Canada is continuing to build a case for higher interest rates – just not yet.
The central bank kept its key rate unchanged at 1.25 per cent on Wednesday, citing an economic slowdown early this year plus weakness in housing, trade and investment.
Even though many of the essential ingredients for higher rates are falling into place, the bank said it remains “cautious” about future rate hikes, according to a statement accompanying its rate decision.
The bank has raised its key rate three times since last June and many economists expect at least one or two more hikes this year, with the first possibly in July.
On the one hand, the economy is near full-capacity, unemployment is at its lowest level since the 1970s and inflation has climbed back to the Bank of Canada’s 2-per-cent target.
But a host of other factors are still weighing on the economy, including uncertainty over the North American free-trade agreement, loss of market share by exporters in the vital U.S. market and the record debt levels of Canadians, Bank of Canada Governor Stephen Poloz said.
“The economy is in a good place,” Mr. Poloz told reporters in Ottawa following the rate announcement. “However, all is not quite normal. Interest rates are still very low.”
So, yes, the economy is growing – at a 1.3-per-cent annual rate in the first quarter and 2 per cent for the year as a whole, according to the latest Monetary Policy Report, released Wednesday. But conditions wouldn’t be this good without hefty doses of low interest rates from the central bank and fiscal spending by Ottawa and the provinces, Mr. Poloz explained.
The central bank is still determined to raise its key interest rate. But it’s not making any promises about how fast the rate will get back to a neutral level of 2.5 to 3.5 per cent – where the economy is growing steadily and inflation is stable.
“The pace is a significant question mark for us,” Mr. Poloz said.
The prospect of a slower pace of rate hikes helped send the dollar down roughly half a cent Wednesday, to 79.16 cents (U.S.) by late afternoon.
“The core message … appears to be that Poloz and company remain set on further hikes, but are in no rush to get there,” Toronto-Dominion Bank economist Brian DePratto said in a research note.
Part of the bank’s go-slow stance on rate hikes is because the economy’s capacity to grow is also expanding. The bank boosted its estimate of potential output growth by two to four percentage-points in each of 2018, 2019 and 2020, according to its latest forecast. The median is now expected to be 1.8 per cent in each of those years.
If the bank is right, more capacity will allow the economy to grow at a faster clip without sparking inflation.
The economy is now expected to grow at an annual rate of 1.3 per cent in the first three months of this year, down from the 2.5 per cent it forecast in January, the central bank said.
The bank also downgraded its forecast for the year as a whole – to 2 per cent, from a previous estimate of 2.2 per cent. But growth will be a bit stronger than expected in 2019 and 2020, at 2.1 per cent and 1.8 per cent, respectively, according to the bank.
For now, at least, Mr. Poloz and his top officials seem more preoccupied with factors holding back the economy than all the things going right.
“Both exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies,” the bank said.
Particularly worrying is the fact that Canada is still losing its share of non-energy imports in the vital U.S. market, even as the Canadian dollar has depreciated in recent years, the bank pointed out. It blamed the problem on competition from China, protectionism as well as a contraction of the auto sector, triggered by the failure of car plants in Canada to get work on new lines of vehicles.
Meanwhile, tighter federal mortgage rules, introduced in January, are weighing on housing activity, particularly in the once-booming Toronto market.