Wednesday, 20 March, 2019

Bank of Canada holds rate steady, notes 'increased uncertainty' about future hikes

Bank of Canada Governor Stephen Poloz's next interest rate decision is scheduled for the end of April Bank of Canada Governor Stephen Poloz's next interest rate decision is scheduled for the end of April
Priscilla Morrison | 10 March, 2019, 11:28

In prepared remarks of a speech in Hamilton, deputy governor Lynn Patterson said the Bank of Canada's policy-makers had been expecting a growth slowdown in the energy sector over the final three months of 2018, particularly after the oil-price drop late in the year.

Not only has the slowdown been deeper than expected, but Statistics Canada's downward revisions to growth in the first half of past year suggest there may have been more excess capacity going into the slump than previously thought.

The first half of 2019, the bank added, is now on track to produce weaker numbers than its projection two months ago. We will have more to say at our next interest rate announcement in April.

It's a mixed picture, and we need more time and more data to better understand what's going on. Exports and business investment have gone cold, as weak oil prices and the trade wars sap business confidence.

The Canadian dollar lost almost half a cent after the central bank announced today that it is maintaining its key interest rate at 1.75 percent.

The more important question will be whether last week's disappointing economic data prompt the central bank to reconsider the merits of adding to its five interest rate increases since mid-2017.

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To be sure, Statistics Canada reported late in February that non-residential investment will rise 2.5 per cent in 2019, according to a survey of companies, compared with increases of 2.5 per cent past year and 4.3 per cent in 2017.

Indeed, the central bank's neutral rate range has become contentious, with bond investors warning that it may be too high for Canada's debt-laden economy, hurting its use as a signpost for monetary policy. The U.S. dollar is strong and constraining financial conditions; the Canadian currency is so weak that it's probably undervalued, according to Derek Holt, an economist at Bank of Nova Scotia.

"Against this backdrop, I'd expect the hurdle rate to resume rate hikes to be quite high", said Sophia Drossos, a former economist at the U.S. Federal Reserve and Morgan Stanley, who now runs her own advisory firm in NY. "We still expect Canadian economic growth to pick up later in the year, supported by ongoing strength in employment and rising wages", she said. TD securities notes the latter has seen double-digit annualized declines in two straight quarters.

The central bank said the current slowdown in the world economy has been "more pronounced" than it anticipated in its January forecast.

The Canadian dollar and long-term interest rates also reflect a weakening of the economic outlook since the last BoC rate decision, however, Canadian stocks have surged in 2019. It is hard to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.

The energy sector shed 0.8 percent, as oil prices eased due to bullish output forecasts by two big USA producers and a build in weekly US crude stockpiles outweighed OPEC-led production cuts.

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