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The Bank of Canada keeps its key rate at 1%

25 October 2017

The Bank of Canada held interest rates steady on Wednesday, as expected, saying that while less stimulus will be required over time the bank will be cautious as it considers future moves given the risks and uncertainties facing the economy.

The bank warned Wednesday it expects to stick to its rate-hiking path, although at perhaps a more-tentative pace.

But the bank said it has chosen not to fully quantify the potential damage to Canada's economy and export prospects until it has more clarity about what will happen.

The bank said it expects inflation to rise to two per cent by the end of next year - a little later than expected, because of strength in the Canadian dollar.

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The upshot of Wednesday's announcement appears to be that the Bank of Canada is now entering the go-slow lane after pushing through two back to back interest rate hikes earlier this summer.

The statement "is clearly a move to a more dovish stance by Bank of Canada", said Nick Exarhos, an economist at CIBC World Markets.

The Bank of Canada flagged potential risks to the Canadian economy from flailing NAFTA negotiations and the ongoing trade dispute between USA aircraft giant Boeing and Canada's Bombardier. The bank is assessing the "sensitivity of the economy" to borrowing costs - among other things - as it makes future rate decisions.

Indeed, the fate of NAFTA talks has likely become a factor that will "critically" influence the timing of the bank's next interest rate hike, wrote BMO chief economist Douglas Porter.

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Canada's second quarter economic growth was stronger than expected, notes the Bank.

A significant decline in housing prices could have a palpable negative impact on those regions, with limited spillover effects in the rest of Canada. However, this outlook remains subject to substantial uncertainty about geopolitical developments and fiscal and trade policies, notably the renegotiation of the North American Free Trade Agreement. Growing protectionist pressures in the US and competitiveness challenges could prompt Canadian firms to move production capacity overseas to offset the risk, the central bank said. These changes will largely be consequences of higher borrowing rates, higher household indebtedness and policy measures aimed at cooling hot real estate markets, the report said.

Another growing concern for the central bank is the "unexplained softness" of Canadian inflation.

The central bank said a decline in Canada's unemployment rate to 6.2% "likely overstates the degree of improvement" in the country's labor market, pointing to modest wage gains and below-average hours worked.

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The Bank of Canada keeps its key rate at 1%